Ten US Municipal Bankruptcies Expected In 2009

Ian Cooper
updated | Author's Website

After a disaster of a year, 2009 isn’t shaping up to be a walk in the park either.  Sure, Option ARM resets will wreak havoc on defaults and foreclosure rates, but that’s the least of our concerns.

Now, the accountant (who predicted the 1994 Orange County bankruptcy) believes we’ll see up to 10 municipal bankruptcies in 2009.  And if that happens, we could watch as the $2.7 trillion market for state, county and city debt is shattered.

In 1994, John Moorlach warned that Orange County, California’s investing strategies could wreck its finances.  And he was right.  Six months later, the county went bankrupt after losing $1.6 billion. 

And he now believes that four cities in California and six others nationwide could seek court protection under Chapter 9 of the bankruptcy code in 2009.

But Moorlach may be too optimistic.  Richard Ciccarone, a research officer, for example, believes we’ll see 36 bankruptcies over the next two years; 12 defaults in 2009 and at least 24 in 2010.

Note: For more on Municipal Bankruptcy Law, click here and here.

Here’s more from Bloomberg.com:

“States project a $97 billion shortfall over the next two years, according to the National Conference of State Legislatures. This mounting pressure on public finances gives President-elect Barack Obama’s administration “strong incentives” to provide federal aid, wrote George Friedlander, a municipal strategist at Citigroup Inc., the largest U.S. underwriter for tax-exempt bonds, in the firm’s Dec. 12 Municipal Market Comment.

Three Considering

“In an environment where the federal government needs to stimulate the economy, keeping states from being forced to take steps that are rapidly and severely restraining will become absolutely essential,” Friedlander wrote. He could not be reached for comment yesterday.

Two California cities, Rio Vista, with a population of 8,000, and Isleton, a 10th as large, have said budget gaps and debt loads may force them into insolvency. Likewise, Jefferson County, Alabama, which is trying to restructure $3.2 billion in sewer debt, has considered what would be the largest U.S. municipal bankruptcy.

The most such filings in a year is 104 in 1940 at the end of the Great Depression, according to a 1964 study, “The Postwar Quality of Municipal Bonds.” Since 1980, the record is 18 in 1987, the year of the Oct. 19 stock-market crash.”

“If well-known localities turn up among the insolvent, he said, borrowers’ costs will increase at least 50 basis points. A basis point is 0.01 percentage point. If the interest rate on 10- year bonds worth $1 million increases to 5.5 percent from 5 percent, borrowers pay an additional $50,000 over the bonds’ life. Tax-exempt yields on the Bond Buyer 20-bond index were at 5.46 percent on Dec. 19.”

“Now, he says, three or four of next year’s insolvencies will be in California, the biggest borrower in the municipal bond market. State lawmakers are grappling with a $14 billion shortfall in the fiscal year that ends June 30. A $42 billion hole is projected for the year that begins July 1. The state this year has sold $21.6 billion in tax-exempt bonds while localities have sold $31.1 billion, according to data from Thomson Reuters.

“The market for municipal credit protection has “quite literally, gone haywire,” Citigroup’s Friedlander wrote Dec. 12, noting that the cost for California debt was higher than for Turkey’s. “These prices bear no relationship to real risks whatsoever,” he said in the report.”

“More Chapter 9 filings are not inevitable, said Bruce Bennett, a partner at Hennigan, Bennett & Dorman law firm in Los Angeles who designed Orange County’s 1994 bankruptcy strategy.”

“Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Orange County needs to close a projected $84 million gap in next year’s $700 million general fund. On Dec. 11, after the state cut funding for social services, county leaders said they would lay off 210 workers. Nick Berardino, general manager of the Orange County Employees Association, the county’s largest union, said politicians have been slow to respond to suggestions on how to prevent layoffs.”

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