| April 17
April 17 America's swelling ranks of fallen
municipal borrowers have been blamed in the past year on
'what-were-they-thinking' causes, be it a Taj Mahal sewer system
in Alabama or an overpriced trash incinerator in Pennsylvania's
capital city of Harrisburg.
But the next series of major cities and counties in danger
of defaulting on their debt can hardly point to one single
decision for their malaise. Whether it be Detroit, Miami or
Providence, Rhode Island, their problems have a lot more to do
with financial policies that put them on course to live well
beyond their means.
Municipal defaults have shot up since 2007 and are on pace
for another high year in 2012, according to Richard Lehmann,
publisher of the Distressed Securities Newsletter.
Many failures will be due to local politicians' willingness
to give unionized local government workers lucrative pensions
and health care benefits when times were good. For others, the
housing bust was enough to destroy their real estate tax base.
They almost all share the failure to prepare for a rainy day.
Now, belt tightening by state and federal governments is
adding to the pain - as contributions to governments at city and
county levels get squeezed. Many of the places in the worst
condition are in the Northeast, Midwest, California and Florida.
The new tide of defaults may worry some investors in the
$3.7 trillion municipal bond market who have so far shrugged off
the fiscal crises of local governments and yield cuts in local
"This is a lagging process," said Richard Ciccarone,
managing director at McDonnell Investment Management.
"Capitulation may not come for years. In the crash of 1929, the
defaults did not come until 1934 or 1935. The marginals hang on
as they can."
Take a look at Miami. The city just added a futuristic
baseball stadium to its skyline and is gaining prominence as a
global business center even as Miami's exposure to declining
housing values, low reserves and high pension obligations worry
some bond buyers.
The long-running housing crisis threatens Miami because drops
in city property values are only now strongly hurting tax
payments, according to institutional investor Chris Ihlefeld of
Thornburg Investment Management.
"Miami was dealt a pretty big blow following and during the
recession in terms of property tax revenues," he said. "Part of
the smoothing process implies that when you had a problem two
years ago, it'll show up now."
Ihlefeld said his firm had concluded that Miami, which is
wrestling with a budget shortfall nearing $40 million, had
relatively high debts and other credit negatives.
Detroit, where the long decline of the region's car-making
industry and $300 million a year in pension costs may help lead
to a state-government takeover, also suffers from weakened tax
collections, along with many other local governments.
Administrators of Chicago's vast public schools system face
a $700 million budget gap created by shrinking federal funds and
widening debt, pension and other costs. Chicago's mayor warned
last week that property taxes in the city would have to be hiked
150 percent if government-workers pensions are left as they are.
One of New York's wealthiest counties, Suffolk County on
Long Island, in March declared a financial emergency and
reported worryingly low liquidity and a projected three-year
deficit of $530 million blamed partly on overspending.
Twenty three villages and cities in Ohio, as well as five
school districts in the state with a slowly expanding economy
and a history of heavy home foreclosures, are in fiscal
emergency, according to the Ohio state auditor's office.
Badly hit by the burst of the property boom, California's
Stockton, with 292,000 people and east of San Francisco, has
endorsed defaults on $2 million of debt payments and may file
for municipal bankruptcy if it cannot reach deals with
creditors. The California ski resort, Mammoth Lakes, is also
bargaining with creditors in a bid to avoid bankruptcy.
By far the most populous state and issuer of muni bonds,
California suffers from sagging home prices, with values in Los
Angeles and San Francisco off 40 percent in the five years
through January, according to data reported by Standard &
Declining property values that result in lower property tax
assessments are likely to continue since property assessments
trail by years falls in market prices.
"Over the next year or two, there is a big risk of more
Chapter 9 filings in certain parts of the country: California,
Rhode Island and the Midwest," said municipal bankruptcy lawyer
David Dubrow of Arent Fox.
In California, in addition to Stockton, Monrovia and Pomona
could find themselves in crisis, according to an analyst who
sees low liquidity, excessive debt loads and outsized pension
liabilities as key warnings.
In Rhode Island, where the governor backs legislation to
reduce operating costs for distressed local governments, cities
such as Providence and Pawtucket are seen as possible candidates
for bankruptcy. Afflicted by underfunded pensions, the state's
Central Falls is bankrupt.
Despite the growing list of potential defaults, it is still
a relatively rare occurrence for issuers to miss scheduled bond
payments in America's $3.7 trillion municipal debt market.
Still, such failures have ballooned in the past years.
Bond defaults were $25.355 billion in 2011, or nearly five
times the value of defaults in 2010, according to Lehmann. In
2012's first quarter, defaults totaled $1.245 billion, or more
than double the $522 million of last year's first quarter.
Municipal bankruptcies, such as last November's landmark,
$4.23 billion Chapter 9 filing by Alabama's Jefferson County
mainly because of its excessively expensive sewer system mocked
as a Taj Mahal project, have picked up, too.
Chapter 9 municipal bankruptcy filings doubled to 13 in 2011
from six in 2010, but still remain rare among the more than
60,000 issuers, with only 49 of the 264 cases since 1980 being
towns, cities, villages or counties, according to James Spiotto
of Chapman and Cutler LLP. States are ineligible for Chapter 9.
Outsized pension-deficit payments and other liabilities, as
well as depressed local economies or failing government projects
such as Harrisburg's trash incinerator, often herald crises,
according to Ciccarone.
Many local governments struggle even as broad, if muted,
economic gains lift revenues for states and some local
governments, which reported to the U.S. Census that overall
revenue rose in late 2011 to a 23-year quarterly high of $387.2
That was a ninth consecutive up quarter for local
government and state revenue and solidified 2011 as the
best-ever year with total revenue of $1.35
That broad snapshot obscures often crushing pension
deficits and other dogged problems that individual local
Persistently high jobless rates and reductions in state and
federal aid, as well as round after round of government layoffs,
service cuts and fee increases in recent years, leave mayors and
other local officials with few ready remedies, according to
Moody's Investor Service Managing Director Naomi Richman.
At an industry conference last month in Philadelphia,
Richman said, "A lot of the easy fixes are gone."