In the national news and on the minds of municipal bondholders across the country is the bankruptcy of Stockton, CA. On June 28 the town of Stockton, CA, filed for Chapter 9 bankruptcy protection. This is not the first town to file for bankruptcy with outstanding bonds however its aggressive attitude toward bondholders has those in the municipal bond market concerned.
Kelly Nolan and Mike Cherney writing for WSJ.com point out the dangers for current bondholders. Stockton missed bond payments earlier this year and does not plan to make any further payments during its reorganization. This lack of concern for making debt payments is unusual. Cities such as Vallejo, CA and Central Falls, RI, are going through bankruptcy and have reported that they are making every effort to keep their bondholders whole. Few cities, towns, villages and counties actually file for bankruptcy as it could make it more difficult to get funding in the future. Specifically, only 51 such entities have filed since 1980 with a quarter of them since the economic recession in 2008. Stockton City Manager Bob Deis reports massive spending and staffing cuts already and claims that “further reductions to service levels would not only jeopardize the safety of residents, they also would severely limit this city’s chances for economic improvements”.
It appears that no help will be coming from state coffers either. Unlike the help Michigan has extended to its municipalities, the state of California refuses to get involved citing their own problems. A new law that mandates a 60 to 90 day mediation process may prove helpful but it is too early to tell.
Whether or not a municipality can get away with thumbing their nose at bondholders remains to be seen. When long-term bonds are purchased a good faith return on that investment is expected. The hard-line approach could change the bond market forever and alienate much needed investors.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.