Municipal defaults and bankruptcy actions similar to those recently taken by the cities of Stockton and San Bernardino in California are likely to remain few in number but may indicate a new trend in fiscally troubled cities unwilling to pay their debt obligations, says Moody’s Investors Service in a new report.
The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities — in California and, perhaps, elsewhere — will begin to view debt service as a discretionary budget item, and that defaults will increase
Most municipal defaults and bankruptcies involved exposure to failing enterprise projects, such as convention centers, sports arena, or other endeavors backed by a government until the project and its debt are left to falter. In contrast, Stockton’s and San Bernardino’s bankruptcy filings are unusual in that they were not precipitated by the realization of enterprise risks but rather from stress on their core government operations, notably high pension and other employment benefits and debt service.
A growing-but-still-small number of financially strapped governments may take a more calculated approach to weighing the costs and benefits of default or bankruptcy in the face of current conditions, said Moody’s. Even a slight increase in bankruptcy filings would mark a significant departure from the historical pattern.