Tuesday, May 25, 2010

Restructuring Experts predict more municipality bankruptcy

Getty Images
Vallejo, Calif., is one of the few U.S. cities to have filed for Chapter 9 bankruptcy protection.

Indicating how serious a cash crunch many cities and counties are facing, more restructuring professionals expect a major U.S. municipality to default on its debt than predict that a foreign country will be unable to keep its loan commitments, a new survey has found.

In a poll released Monday by consulting firm AlixPartners LLP, 90% of respondents predicted a significant American municipality will default on its debt before 2012. Only 63% of those professionals, however, believe that a foreign country will default in that same period, despite the debt crisis unfolding in Europe.

The survey results likely reflect that there is a willingness among countries in Europe and the Middle East to work together to avoid a debt default, while most believe it’s unlikely that Washington would come to the aid of municipalities, said Peter Fitzsimmons, AlixPartners’ North American president.

“There is very little appetite at the federal level to bail out local governments, and the problems in some cities are severe enough that there will probably be a default,” he said.

A number of municipalities, including Harrisburg, Pa., Detroit and San Diego, have openly discussed their deep financial problems and have even contemplated filing for Chapter 9, the section of the U.S. Bankruptcy Code that governs municipal filings.

Municipalities are struggling in part because widespread foreclosures and commercial property vacancies have caused property values to fall, which in turn limits how much property tax local government can be collected, said Juliet Moringiello, resident scholar at the American Bankruptcy Institute.

“The impact of the financial crisis has trickled up to municipalities,” she said.

AlixPartners, a Southfield, Mich., turnaround firm, polled 91 bankruptcy lawyers, bankers and fund managers earlier this month as part of its annual survey of restructuring professionals.


  1. A short, yet telling article about municipalities, and the chances of bankruptcy....as tax revenues fall, cites have more and more problems.

  2. There is a point at which municipalities can no longer deliver necessary services, due to this revenue loss. A great example of this is East St Louis, Illinois that went bankrupt about 20 years ago. The victim of corruption, white flight, and an increased concentration of poverty, East St Louis had one of the highest property tax rates in Illinois, while having one of the lowest per capita incomes. Sadly, little has changed.
    I wonder not whether cities will fall into this trap, but how they would expect to dig themselves out once they had succumbed to bankruptcy - with credit ratings ruined, there would be little money available for infrastructure and economic development.