City bankruptcies trend troubles bond investors

Eve Troeh Jul 26, 2012
HTML EMBED:
COPY

City bankruptcies trend troubles bond investors

Eve Troeh Jul 26, 2012
HTML EMBED:
COPY

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.

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.