Standard & Poor’s (“S&P”) released a report in January 2013 stating that the Chapter 9 bankruptcy filings by the California cities of Stockton, Mammoth Lakes, and San Bernardino in 2012 do not represent a trend. Rather, S&P believes that each bankruptcy resulted from faulty decisions at the individual city level.

Although S&P still expects the credit quality of several California cities to decline in 2013, the agency also believes that a greater number of cities will enjoy improved credit ratings. According to the report, “[d]espite the trio of bankruptcy protection filings in the state last year, most California cities absorbed the impact of the Great Recession and preserved their credit quality.” The report added, “[w]e believe the small number of municipal bankruptcies is a testimony to the resilience of local governments and their ability and willingness to scale back expenditures and align them with lower revenues.”

The report contradicts recent predictions by market...

Detroit is in a state of crisis. In addition to the “traditional” municipal financial woes of decreasing revenue, legacy pension burdens, and an increased demand for services, Detroit has several more practical and unique problems. 

First, according to the Wall Street Journal, there has been a mass exodus from the city of Detroit. Almost 25% of Detroit’s total population left the city between 2000-2010. The resulting smaller tax base has led to a “top line” revenue problem for the city. 

This exodus has also contributed to a second problem. From a land mass perspective, Detroit is simply too large with only 713,000 residents spread across 139 square miles. This geographic sprawl makes providing basic municipal services inordinately expensive. There are neighborhoods with literally more abandoned houses and buildings than residents.

Consequently, Detroit mayor, former NBA star Dave Bing, has proposed plans for the revitalization of certain areas, including the city’s waterfront, in the...

With Fitch Ratings amending additional sections of its municipal ratings criteria and Moody’s Investors Service expecting further financial stress on California municipalities  and  additional credit downgrades, the risk of further municipal defaults is a major concern for many potentially affected parties.  The critical question for California legislators, residents and creditors is, how real is that risk? 

Recent information reported by The Federal Reserve Bank of New York indicates that while the municipal default rate is low, it is not nearly as low as previously reported. 

The reason?  Ratings agencies only track defaults for rated bonds.  Compounding this potential under reporting is the fact that unrated bonds are usually issued by municipalities with lower credit quality, which are thus more likely to default on their obligations than those able to get rated credit. 

Specifically, the Bank’s analysis found that Standard and Poor’s reported that its rated municipal bond issuers...

Moody’s Investors Service’s projected outlook remains grim for California cities.  Many continue to face severe declines in property and sales tax revenue, while foreclosures remain high and the return of anything close to peak values in the housing market is unlikely to occur anytime soon. 

Moody’s believes that these economic factors, combined with California’s “hands off” approach to municipal strife and the inability of municipalities to raise property taxes because of Proposition 13, will likely result in additional Chapter 9 filings and the downgrading of debt issued by California’s distressed municipalities. 

Moody’s Subscribers can access the report here. 
 

Fourth California Chapter 9 Filing Looms

Municipal leaders of Atwater, California will meet next Wednesday to discuss a declaration of fiscal emergency.  Such a declaration would give Atwater an “escape hatch” from the requirements imposed by AB 506 that distressed municipalities negotiate with their creditors before seeking bankruptcy protection, and would pave the way for a potential Chapter 9 filing sooner rather than later.

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California Tries to Ward Off Additional Bankruptcies by Pension Repair

A new California law taking effect January 1, 2013, will make new municipal employees take greater responsibility for their own retirement savings.  Specifically, the law requires new employees to contribute half of their pension costs, raises the retirement age, and caps the annual payout to employees.  Whether this measure alleviates the need for additional Chapter 9 municipal bankruptcy filings or is too little too late remains unclear.

S&P:...