Advisors, take note: If your clients are worried about higher taxes in the future, or just simply want a safe trickle of income from their investments, muni bonds could be safer than you think.

Some analysts are going against the grain and saying that the worries of defaults in this asset class are overblown. Those fears come from the fact that this economy, the worst downturn since the Great Depression, has turned the thumbscrews on many state and local governments, which, in turn, will affect their bond issues.

But some analysts and municipal strategists say the headlines about budget gaps exaggerate their influence on credit quality.

While governments may have to cut costs, raise taxes, or tap reserves, analysts say the impact on large-scale municipal government defaults is overstated by some market observers. "A number of commentators have emerged forecasting widespread defaults in the muni market," Phil Fischer, muni strategist at Bank of America Merrill Lynch, wrote in a recent report. "After the Panic of 2008, we are acutely aware of the fat-tailed world we live in where extreme outcomes are possible. Nevertheless, Pollyannas are out, as are doomsday scenarios."

To be sure, not everyone agrees. New York Lieut. Gov. Richard Ravitch and hedge fund manager James Chanos have slammed municipal credit this month.

Ravitch has been quoted with very bearish comments on the muni market, saying that there will be defaults after the effectiveness of the government stimulus wears off. And Chanos outlined numerous arguments against local government credit in Barron's recently.

Indeed, governments have rung up hefty pension liabilities and "platinum-plated" health care costs, Chanos said, and they dissemble the erosion in their true fiscal health with accounting gimmickry.

States face a total of $350 billion in budget gaps this year and next, according to the Center on Budget and Policy Priorities. Meanwhile, tax receipts by state and local governments plunged 12.2% in the second quarter, compared to the second quarter of 2008, according to the Census Bureau-the steepest plunge in at least 20 years. Income taxes were particularly weak, sinking 27% over the same period.

The most obvious rejoinder to the worries over defaults is municipalities' stellar credit history.The cumulative default rate on municipals rated investment grade by Standard & Poor's is 0.2%. Municipals rated investment grade by Moody's Investors Service fared even better, with a default rate of 0.07%. As Chanos pointed out, though, just because it hasn't happened yet doesn't mean it won't. After all, markets endured plenty of unprecedented or previously rare travails last year. And munis defaulted en masse in the latter stages of the Great Depression, according to a 1971 study.

But Bank of America's Fischer does not think much of the parallels between the Great Depression and today. The sheer magnitude of the Depression negates the similarities, he says. Furthermore, economists and policymakers are more sophisticated now and better equipped to mitigate financial crises, he says.

George Friedlander, municipal strategist at Morgan Stanley Smith Barney, in another recent report, listed several reasons why he thinks state and local government defaults will remain rare. Chief among the reasons why municipalities will continue repaying their debt, Friedlander says, is that they have to. Governments know they need to borrow regularly and cannot afford to repel investors by defaulting on bonds, he says.

Aside from losing access to the capital markets, filing for Chapter 9 bankruptcy is not an easy way out, anyway. It can be a difficult process that does not ease the debt burden after all, he noted.Moreover, repaying debt normally does not impose a big cost on municipalities, Friedlander said. According to a Citigroup study, paying off debt represented only 8% of revenue at the state level.

Friedlander doubts any state would be so irresponsible as to allow a deficit to interfere with servicing debt. "Suggestions that the municipal bond market will be the scene of widespread disruptions in debt repayment are, in our view, greatly overstated," he said. "We certainly do not agree that many of the conclusions about eroding credit quality are accurate, consistent, or even relevant."

Fischer and Friedlander both acknowledge government finances will continue to be squeezed. Friedlander warns that the risk of downgrades and scary headlines are indeed sending bond prices on a more volatile path, but that is a different story altogether from defaults. Fischer notes that the increased frequency of defaults among nonrated bonds is "true and to be expected." But defaults on rated bonds remain "quite rare," Fischer says.

The hand-wringing over municipal credit is good news for Mitchell Savader, chief executive of Savader Asset Advisors.His firm, which performs credit research for asset managers, has seen an uptick in business as people worry about credit and defaults in the post-bond insurance era, he says.