(Reuters) - Troubled U.S. local governments like Harrisburg, the capital of Pennsylvania seeking Chapter 9 bankruptcy protection, have fewer helping hands than during any time in decades.
State governments battling slow revenues and a federal government preoccupied with cutting debt and spending are increasingly less likely to bail out cities, counties and other local governments threatened by debt defaults or bankruptcy.
Defaults in America’s $3.7 trillion municipal bond market are likely to increase — but the nature of the muni market makes a tsunami of bankruptcies a long shot.
Stubbornly high unemployment running at double-digit rates in some U.S. regions, slow economic growth and weak revenues mixed with higher demands for services all weigh on local governments as emergency federal aid granted in 2009 runs out and Congress looks for ways to send fewer dollars to local governments.
Washington policymakers, in what local officials see as an extraordinary sign of federal seriousness toward belt-tightening, are considering curbing tax exemptions on municipal bond interest — a politically popular source of great savings to cities, counties and states.
“A lot of municipalities are also not facing up to underfunded pension and retiree health costs. Those are problems that don’t have an easy solution, other than cutting vital services,” said Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
The outlook for local and state governments is negative, Moody’s Investors Service said in a commentary last month that advised states in coming years to plan on less federal financial help.
That, in turn will translate into less state education, healthcare and other aid for cities, counties and other local governments, which the Wall Street credit ratings group predicted will endure more ratings cuts than hikes.
Local governments, too, are hurt by falling property taxes caused by the country’s long-running housing crisis.
Bond defaults and Chapter 9 bankruptcy filings, such as Harrisburg’s, will remain rare, Moody’s said.
“They got way in over their head,” Lehmann said of Harrisburg. An ill-fated incinerator project saddled the city with $300 million of debt it could not service. “It’s not an indicator of a massive wave of bankruptcy filings.”
Like Alabama’s Jefferson County, the home of Birmingham, that last month narrowly avoided a Chapter 9 filing with a provisional deal to settle $3.14 billion of soured debt, Harrisburg overspent, according to Lehmann.
“Harrisburg and Jefferson County would have happened no matter what the economy did,” Lehmann said. “These problems were known for years, and that’s typical. There aren’t a lot of other big ones out there now.”
Lehmann, who tracks troubled securities for investors, said he expects defaults of muni issuers in coming years to be concentrated in such sectors as housing development bonds and tobacco-litigation debt sold by states.
For some investors it might revive fears that rocked the market six to eight months ago of a wave of possible defaults. More likely, though, investors may start to look closer at individual community muni debt, as it is decoupling and becoming less dependent on the states, said Joshua Laurito, co-founder and principal of the fundamental muni market data provider Lumesis.
In Florida, which has one of the worst U.S. housing markets, 168 issuers of community development bonds with a face value of $5.1 billion bonds have defaulted, according to Lehmann. Nevada and California also have relatively high numbers of defaulting issuers of the tax-free bonds, which are used to pay for sewers and other infrastructure in housing developments, he said.
Reporting by Michael Connor in Miami; Editing by Kenneth Barry