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Budget Cuts May Avert Any ‘Blip’ in Muni Bankruptcies

State and local governments are likely to avoid bankruptcy through spending cuts, even as their financial stress mounts, according to panelists at a Securities Industry and Financial Markets Association seminar.

Debt tied to charter schools and assisted-living centers is among the most troubled in the municipal-bond market, said William Kannel, a bankruptcy lawyer with Mintz, Levin, Cohen, Ferris, Glovsky & Popeo in Boston. For states and cities, lower spending and fear of damaging their credit will make bankruptcy filings unlikely, speakers said today on the panel in New York.

The worst recession since the 1930s reduced 2009 state sales, income and corporate taxes by $79 billion from the preceding year, the U.S. Census Bureau reported. Pennsylvania’s capital of Harrisburg and Alabama’s Jefferson County, home to Birmingham, have publicly discussed bankruptcy to cope with debts.

“In the end I don’t see a huge blip” in filings, said James Spiotto, a partner with Chapman & Cutler, a Chicago-based law firm. He said he has been involved in more than 400 municipal-finance workouts, or debt restructurings. Spiotto said 45 cities and towns have sought bankruptcy court protection under Chapter 9 since 1980, including three since 2008.

“I think we’re going to see very little change,” said Frank Shafroth, who represented the National League of Cities as a lobbyist on Chapter 9 issues and now works for the Municipal Securities Rulemaking Board. “I don’t see it happening in any serious way.”

Financial Stress

Signs of financial stress include an average drop of almost 13 percent in inflation-adjusted state tax revenue for each of the past four quarters, compared with a year earlier, the Nelson A. Rockefeller Institute of Government said this month. In February, the Pew Center on the States pegged unfunded pension liabilities at $1 trillion.

About 187 municipal issues have missed payments to bondholders since last year, said Matt Fabian, managing director of Municipal Market Advisors, a Concord, Massachusetts-based researcher. A total of 495 issuers have filed notice of some type of impairment, such as payment default, reserve draws or other developments, he said

The nonperforming debts are concentrated in certain parts of the municipal market, Fabian said. Among these he listed so-called dirt bonds in Florida that were backed by real estate projects that collapsed in the recession, and hospital bonds.

Out of 25,000 municipal bonds that are rated by companies such as Moody’s Investors Service and Standard & Poor’s, just 14 are in default on payments, Fabian said.

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