(Reuters) - For decades, sizeable bankruptcies have been rare in the $3.7 trillion municipal bond market, but experts say there might be an uptick as counties, cities and towns wrestle with economic recession and stubbornly rising costs.
Until Detroit filed its landmark case on Thursday, there had been four Chapter 9 municipal bankruptcy filings so far this year, compared with 12 in all of 2012 and 13 during 2011, according to James Spiotto, partner at Chapman and Cutler LLP. The four this year were special-purpose districts in Oklahoma and Arkansas.
The great bulk of Chapter 9 filings involve utilities and special districts, Spiotto said. Many cases are blocked by judges. Since 1954, cities, villages and counties accounted for only 61 Chapter 9 filings.
The highest number of bankruptcy filings occurred in Nebraska, followed by California and Texas.
Recent and significant Chapter 9 cases include:
San Bernardino filed for bankruptcy status last August 1, becoming the third city in America’s most populous state during 2012 to use Chapter 9 in a fiscal crisis.
The city of about 210,000 residents located 65 miles east of Los Angeles said it had more than $1 billion in debts and had tapped out its financial reserves.
A federal bankruptcy judge has scheduled a hearing for August 28 to determine if the city is eligible for Chapter 9 shelter.
Stockton, a city of 300,000 located east of San Francisco, filed for bankruptcy in June 2012 and was until Detroit’s declaration the biggest U.S. city ever to seek Chapter 9 protection. After years of fiscal mismanagement and a housing market crash, Stockton was unable to pay workers, pensioners and bondholders.
In April this year, a judge turned aside objections from bondholders trying to scuttle the case and cleared the way for Stockton to move ahead on a debt-adjustment plan, which local officials hope to file in September.
At $4.2 billion, Jefferson County set the previous record for the biggest U.S. municipal bankruptcy filing in November 2011. The county has since negotiated a tentative settlement with most creditors that still must be approved by a federal judge.
The county, home to Birmingham, Alabama’s largest city, is weighed down by massive sewer-system debt. After the loss in 2011 of a local jobs tax that severely reduced revenues, the county cut 1,300 staff jobs, pulled back on government services and stopped payments on general obligation debt.
The county, California’s third-most populous, filed for bankruptcy in December 1994 after rising interest rates savaged investment bets by its treasurer, leaving the county with a loss of $1.7 billion in an investment pool. That put Orange County at risk of a $1 billion default the next year.
Orange County emerged from bankruptcy after 18 months.
Harrisburg, the state capital of Pennsylvania saddled with incinerator debts, lost a bid for Chapter 9 bankruptcy in 2011 and is now under state receivership.
With a population of 50,000, Harrisburg is plagued by $320 million of debt incurred by cost overruns from an upgrade of its incinerator. In a bid to ease debts, the city is selling off thousands of Western and other historical artifacts accumulated by a former mayor to stock local museums that were never built.
Vallejo, a former U.S. Navy town near San Francisco, filed for bankruptcy on May 23, 2008, after failing to address steep city personnel costs and sliding revenue from a housing slump.
In July 2011, the city won court approval for its financial plan to exit bankruptcy protection.
The smallest city in the smallest U.S. state filed for bankruptcy on August 1, 2011, after failing to win concessions from public-sector retirees and others to address an $80 million unfunded pension and retiree health benefit liability, which was nearly quadruple its annual budget of $17 million.
Central Falls last September won court approval of a reorganization plan that cut retiree pensions, raised taxes and left bondholders without losses.
Reporting By Michael Connor in Miami; Editing by Tiziana Barghini and Claudia Parsons