Historically, municipal bonds have been at the low end of the risk spectrum, but economic realities are changing that assumption. According to a May 28 article in CNNMoney by Sara Behunet titled “Three American cities on the brink of broke,” in 2009, 183 municipal issuers defaulted on $6.4 billion of bond payments ? up from 31 defaults on $348 million in 2008. That’s an 1800% increase in dollars and a 590% increase in municipalities in default. This alarming trend is expected to continue, according to the article.
The expected shortfall in revenues needed by municipal governments through 2012 is as much as $83 billion, according to the National League of Cities, the oldest and largest national organization representing municipal governments throughout the United States. Default may be imminent for several cities,
Only one actual default has occurred in the past year, according to the article ? that was Menasha, Wisconsin. Another Wisconsin city barely avoided default by negotiating a forbearance agreement on a state loan. The three local governments identified in the article as being on the brink of default are Jefferson County, Alabama, Harrisburg, Pennsylvania, and Detroit, Michigan.
Jefferson County was the victim of a 2003 interest rate swap refinancing of its debt that only benefited Wall Street and corrupt city managers who allegedly received kickbacks. The insurers that guaranteed Jefferson County’s bond are themselves teetering. Harrisburg owes more in bond interest than its entire annual budget, and the Governor of Pennsylvania has said the state will not bail Harrisburg out. Detroit issued $250 million of 20-year notes to cover a $280 million 2010 budget shortfall. According to the article, demand is high because of a state guarantee to make payments if the city defaults.
A municipal bankruptcy would be ugly. “It opens a city up to seizure of public and perhaps even private property, judicial oversight of city spending, state assumption of the debt, and a lien [on] tax revenues.” It is a rare occurrence. However, the article’s conclusion that a large-scale default or bankruptcy causing a massive financial seizure “isn’t likely” is not very reassuring, especially with the staggering increase in municipal bond defaults over the last year.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling investors regarding municipal bonds. For further information, please contact us.