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City bankruptcies trend troubles bond investors

If debt-ridden municipalities begin walking away from their financial obligations the way homeowners once did, such strategic defaults could wreak havoc for municipal bond holders.

Tess Vigeland: Pretty much any time a city files for bankruptcy protection, it's news -- because it's rare.

At least, it used to be. But a rush of California towns filing for Chapter 9 has to make you wonder if maybe the stigma's gone away, and we'll see a landslide of cities walking away from their debt.

But "walking away" doesn't work the same for a town as it does a for, say, an underwater homeowner. Marketplace's Eve Troeh reports.


Eve Troeh: Municipal bonds are the minivans of investing -- reliable, not sexy. Cities issue bonds to pay for important things: schools, sewer pipes, public parks. They don't promise investors huge returns. They attract capital with the promise of safety.

John Mousseau: Basically, we will do anything we need to do to pay off these bonds.

John Mousseau follows bonds for Cumberland Advisors. He says "anything" could mean raising taxes, imposing new fees.

Towns can raise money in ways that you and I, or a corporation, simply can't. So when a town files Chapter 9, officials are saying: We've tried anything, and everything.

Gabriel Petek at Standard and Poor's says it's by no means "walking away."

Gabriel Petek: It's really the beginning of a drawn-out process, likely to be a very difficult one.

Municipal debt can't be discharged in court, the way personal debt can. And municipalities rarely emerge from bankruptcy as easily as some corporations do. Bankrupt towns have to slash services for residents, and sell off valuable assets.

No one in office wants responsibility for that, says lawyer Dale Ginter. He's helped several public agencies file for bankrupcty.

Dale Ginter: The emotional distaste for filing bankruptcy was politically untenable.

Notice he said "was" untenable. Ginter thinks more towns will file for Chapter 9. Many are so deeply in dept, it would be a moral hazard not to file.

And those invested in a bankrupt town? They're still likely to get their money back, and then some. Just maybe not on time.

I'm Eve Troeh for Marketplace.

About the author

Eve Troeh is News Director at WWNO-FM in New Orleans, La., helping build the first public radio news department in the station’s 40-year history. She reported for the Marketplace Sustainability Desk from 2010 to 2013.

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