This is a guest post from Joe Rosenblum, the director of Municipal Bond Credit Research at AllianceBernstein.
Is the municipal bond market on the verge of collapse? You might think so, given the blaring headlines about a few big disasters in the last year. But the truth is that poor decision making, not systemic issues, has caused the most serious problems.
Jefferson County, Alabama, and Vallejo, California, filed for Chapter 9 bankruptcy protection. Receivers were appointed for Central Falls, Rhode Island, and Harrisburg, Pennsylvania. Stockton, California, is deferring debt-service payments (though bondholders continue to get paid from other sources) as it goes through a state-authorized mediation process with its creditors. And most recently, Detroit agreed with the State of Michigan on a shared fiscal oversight process to avoid bankruptcy.
There is no question that state and local governments are facing financial hardship as a result of the weak economic recovery and its impact on tax receipts. But this is not the first time local governments have been challenged or have defaulted on their debt or filed for bankruptcy protection.
In the 37 years since New York City’s brush with default in 1975, there have been a slew of other bankruptcies, defaults and near-defaults. Prominent among them were cases involving the Washington Public Power Supply System (WPPSS); Cleveland, Ohio; Bridgeport, Connecticut; Yonkers, New York; Erie County, New York; and Orange County, California. All of them also grabbed headlines in their day.