Moody’s muniland blacklist
Moody’s this week published a Special Comment (subscription required) that crystallizes a lot of the discussion regarding bankruptcies and defaults that has been going around muniland lately:
Recent decisions to seek bankruptcy protection by two large California cities – Stockton and San Bernardino – provide some indication that willingness to pay debt obligations may be eroding in the US municipal market. Although many municipalities have faced severe fiscal pressures since the start of financial crisis, only a handful of municipalities have chosen not to pay their debt.
Most of these municipalities have defaulted due to exposure to failing enterprises, such as a convention center, sports arena, or other project that was backed by a government until the project and related debt were left to falter. In contrast, Stockton and San Bernardino’s pursuit of bankruptcy are different and potentially more significant given that these defaults emanate not from enterprise risk but instead from stress on core government operations, notably high pension and other compensation costs and debt service.
Moody’s is saying that defaults in this space typically come from municipalities collapsing from the weight of some public project whose cash flow was never enough to cover its expenses and debt service. These are projects that were either never vetted properly or were undertaken by municipalities with insufficient professional expertise to manage them. Some were outright boondoggles.
With the recent moves by San Bernardino and Stockton, Moody’s says that there is a developing trend of cities using bankruptcy to cleanse themselves of liabilities, including those to debtholders, rather than raising taxes or pursuing other sources of revenue. The audience for Moody’s commentary is bondholders, so it makes sense for them to view this as an alarming trend. But as a citizen I think of these moves toward bankruptcy as a positive for communities that are groaning under the weight of bloated labor contracts and pensions for public safety workers. I think in many cases adjustments to labor contracts, which for most municipalities make up 50 to 80 percent of general fund expenses, can only happen in a setting where municipal leaders have the right to throw them out. That only happens in bankruptcy court.
Moody’s does not rate all municipal bond issuers, but they do rate 8,100 local governments. Out of that pool they provide a list of the handful of places where they see high default risk. I thought it would be interesting to determine whether the problems these local governments face came from enterprise debt – such as airports, sport stadiums, etc. – or from this emerging trend of general fiscal weakness. Here is what I found:
|Central Falls, RI||Caa1||No|
|Jefferson County, AL||Caa3||Yes|
|Pontiac City School District, MI||B2||No|
|San Bernardino, CA||NR||No|
|Victor Valley, CA||Ba1||Yes|
Since Stockton’s and San Bernardino’s bankruptcies were announced, we’ve had an outburst of weak municipalities coming forward to air their dirty laundry. Many of these likely have falling revenues and bloated expenses. The jury is still out on how widespread this new trend may be, and it’s likely we will see more analysis like Moody’s published soon.