Aug 14 Barely half of U.S. states allow their
local governments to file for bankruptcy, but Fitch Ratings will
continue to factor in the probability of a Chapter 9 filing for
all tax-supported local debt it rates, the agency said on
Fitch added a new section on the legal and structural
framework of debt in its criteria for rating U.S. local
government bonds supported by taxes, highlighting growing
concerns for municipal bankruptcies and explaining its views of
the ties between local and state governments.
Only 24 out of 50 states currently allow local governments
to file for bankruptcy, "but Fitch believes that in an extreme
case..the state would make the legal provisions necessary to
file," it said.
"Therefore, Fitch makes no distinction in rating bonds that
might be at risk of payment interruptions due to a filing
between entities in states that allow for local government
bankruptcies and those that do not," it said.
It added that some states have other mechanisms to help
local governments get their finances in order, but the agency
does not assume "that such mechanisms will be invoked and that,
once invoked, they will be effective."
For decades, bankruptcies in the $3.7 trillion municipal
bond market were rare. There have been nine Chapter 9 municipal
bankruptcy filings so far this year, compared with 13 in all of
2011.. California is home to three.
As its landmark bankruptcy filing wends its way through the
federal court system, Jefferson County is seeking help from
Alabama's state legislature, which has the sole authority to
restore a local jobs tax that was declared unconstitutional in
March 2011 and was a driver of the country's Chapter 9 filing on
In its new section, Fitch explained that it also "does not
cap a local government's rating at the state's rating," because
cities and counties "have varying degrees of autonomy to
generate revenue and control spending, and in some cases, have
few or no state-imposed restrictions."