Municipal Bond Forum
A fate to be avoided
Q
In light of recent bankruptcies in California, supposed experts have commented that other municipalities will find it less of a taboo. Isn’t the real problem behind a bankrupted municipality its inability to borrow? Why isn’t more being made of this point?
A
James A. Klotz responds:
Despite media reports to the contrary, we don’t expect other municipalities to follow Stockton’s lead. Although bankruptcy may seemingly provide some immediate relief, the long-term consequences are too onerous to be taken lightly.
After three years, Vallejo, California, emerged from bankruptcy in November 2011. It has a much smaller city government and a notable shortage of services, including major reductions in firefighters and police. There has also been a migration of residents because, as Mayor Osby Davis said, “nobody wants to be from a bankrupt city.”
As in the case of Vallejo, you can be certain that Stockton has sacrificed its ability to access the municipal bond market. It is not lost on other city managers and local officials that no investors or bond insurers will accept a general obligation pledge from a city that sought bankruptcy protection.
As for your insightful question on why more isn’t being made of this point: Sensationalism sells, with the saga of Meredith Whitney’s prognostications a case in point. Attention-grabbing headlines are difficult to elicit from reporting that shows things will be status quo.
Start here.
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