California is so not Greece.

That's the broadly held view in the $2.8 trillion municipal bond market, which is puzzled by analysts, columnists, cartoonists and bearish investors comparing Greece's fiscal floundering and $1 trillion bailout to hard-pressed states such as California and Illinois.

It's wacky, said municipal debt analyst Jeffrey Cleveland at Payden & Rygel. Just look at the ratio of debt to state gross domestic product. It's 10 percent for California and somewhere between 104 percent and 150 percent for Greece.

California's economy, at $1.845 trillion, dwarfs Greece's and on a stand-alone basis and would be the world's eighth-largest. It is the biggest borrower in the U.S. municipal market, which states and local governments use to fund roads, sewers and other infrastructure.

Most muni debt comes with tax-free interest and is often bought by rich Americans looking for tax savings.

Munis, whose total returns have smartly outperformed U.S. Treasuries in the last half year, have also become increasingly attractive to foreign institutional investors since 2009's roll-out of Build America Bonds and their fatter taxable yields.

Europe's sovereign-debt tremors last week spread to U.S. taxable credit markets and were felt in the muni market's BABs trading, according to Morgan Stanley Smith Barney Senior Fixed Income Strategist George Friedlander.

U.S. STATE GOVERNMENTS DO HAVE BIG OUTSTANDING BILLS

State governments in the United States, from tiny Rhode Island to huge California, do face daunting yearly budget crises and long-term pension and health care obligations that may require $1 trillion or more to fund over time.

They will not get quick relief via higher tax payments and lower social-services costs from the U.S. national economic recovery because tax revenue for local and state governments lags economic shifts by a year or more.

California's collections of state income taxes have fallen short of forecasts and overall fiscal year-to-date revenue through April is nearly 2 percent below forecast, according to the state's comptroller.

Rhode Island has missed its fiscal year revenue target by a much smaller 0.6 percent, but some people are still worried.

If Rhode Islanders are not looking at Greece, they should be, columnist Edward Achorn said on Tuesday on Rhode Island's Providence Journal newspaper website. Its financial meltdown offers a dispiriting object lesson of what could happen here unless we reverse some trends.

But institutional investors, analysts, ratings agencies and finance officials say a Greek-style collapse of a state government in the United States is immensely remote, despite some parallels in exploding pension obligations and aging populations.

California is not Greece, said Tom Dresslar, a spokesman for California's state treasurer. Greece's budget deficit in 2009 was 13.6 percent of its GDP. Our budget deficit, at $20 billion, was 1.1 percent of our GDP.

LAST STATE DEBT DEFAULT DURING GREAT DEPRESSION

No state, including California, with $83 billion of general obligation, lease-based revenue and other long-term debt, has defaulted on interest payments or principal of municipal debt since Arkansas did during the 1930s, according to Payden & Rygel's Cleveland.

Overall default rates by U.S. municipal issuers between 1970 and 2009 totaled just 0.06 percent, according to a study by Moody's Investors Service, the same agency that rattled global markets last week with a report saying some European banks would be weakened by the Greek debt crisis.

That 0.06 percent 10-year cumulative default rate included no state general obligation stumbles, versus a 2.50 percent default rate over the same four decades among issuers of investment-grade corporate debt.

Then, too, many of the commonly taken routes to relief from debt commitments are barred to state governments. With the exception of Vermont, they cannot legally run deficits like the U.S. federal government and are prohibited from filing for Chapter 9 bankruptcy petition, a rarely used U.S. legal tactic open to some municipal issuers.

It is not possible for the plight of one state to take down the rest, Peter Hayes, a managing director at BlackRock Inc, said in a newsletter. We would also argue that the current fiscal crisis is not a debt problem.

Debt service, such as interest payments among the 50 U.S. state governments, typically runs at just 3 percent of each state's annual expenditures, according to the U.S. Bureau of Economic Analysis.

California debt is different from Greek debt, said Kenneth Naehu, a managing director at Bel Air Investment Advisors in Los Angeles. Our debt service is so small a part of our budget that it is minuscule, and it gets a top priority. For California, restructuring debt is not possible, but for Greece it may be the best thing.

(Additional reporting by Jim Christie in San Francisco, Joan Gralla in New York and Karen Pierog in Chicago; Editing by Dan Grebler)

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