The bones of Meredith Whitney’s failed municipal default prediction have been picked clean. Critics scoff, while defenders note she just had the wrong “D,” as municipal downgrades rose to precarious levels in 2011.
As wrong as she turned out to be, not everyone got off scot-free, and high profile defaults did occur, spooking markets and piquing analysts about where city governments went so wrong.
And as SmartMoney’s Real Time Advice blog notes, cracks in the muni space are once again beginning to show.
“Exhibit A: So-called lease bonds, which are backed by revenue from rental payments on city facilities, are now defaulting at almost 10 times the rate of traditional municipal bonds,” writes the blogger Jonnelle Marte. “Experts say many other types of revenue bonds that rely on income from city projects, such as a football stadium or retirement home, are also struggling to keep up with payments.”
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She quotes Patrick Early, chief municipal analyst for Wells Fargo Advisors, when explaining that the problem is twofold: “The sluggish economy has made it difficult for many of these projects to generate enough revenue, and issuers of these bonds are limited in what they can do to make up for a shortfall. For instance, a transportation authority can raise a toll to help cover bond payments, but if fewer people drive on the bridge that charges the toll, the fee hike might still not be enough to cover debt. State governments, on the other hand, can take other steps, such as raising taxes or cutting services.”
Was Whitney’s prediction simply delayed, rather than dismissed? Fingers crossed as we look back at five recent municipal defaults to glean what we can.
1) On Nov. 10, 2011, Alabama wasn’t so sweet to those who call it home. Jefferson County, which includes the city to Birmingham, had defaulted on $4 billion of financial obligations—the worst municipal default in U.S. history at the time.
Noah Rothman, writing for political news site Politicology at the time, noted the county simply went in the sewer.
“The county voted to upgrade its failing sewer system in the late 1990s but, as municipal projects funded with state, local and federal tax dollars are wont to do, the costs ballooned and obligations skyrocketed …A deal with JPMorgan Chase to reduce the county’s financial obligations though bond auctioning blew up along with much of the economy in the collapse of 2008.”
2) Rhode Island’s catchy marketing slogan, “The biggest little state in the union,” didn’t hold for Central Falls, its smallest city. Desparate to stave off bankruptcy, it fired all teachers at the city’s failing high school in an effort to renegotiate contracts, which garnered national headlines but little else. The trouble stemmed from an $80 million unfunded pension and retiree health benefit liability, nearly quadruple its annual budget of $17 million. However, as Moody’s notes, Central Falls somehow muddled through, and continues to pay creditors on time.