Jefferson County, Alabama’s bankruptcy, the largest municipal filing in U.S. history, accelerated the pace of debt defaults by state and local governments, though it still lags behind last year’s rate.
Adding the county’s $943 million in general-obligation bonds pushed defaults since Sept. 30 above $1.3 billion, more than twice the amount in any of the three previous quarters, according to data from Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
The data show an increasing willingness by municipal borrowers to use reserve funds, bond insurance and letters of credit to deal with budget pressures, Lehmann said today by telephone. And it shows that “while her instincts were right,” Meredith Whitney, the bank analyst who predicted “hundreds of billions of dollars” in defaults this year, “got it wrong in the magnitude and in how municipalities would address their funding problems,” he said in his November newsletter.
“They’re tapping reserve funds,” he said in the interview. “They consider that money they can tap into, and I expect that to continue.”
Reaching into reserves to make bond payments can put the issuer in default of debt covenants. Most of those using the funds have been special taxing units such as development districts set up to support real estate projects in Florida, California and Nevada, Lehmann said. This year’s $2.8 billion in defaults trails the $4.4 billion for all of 2010 and $8.6 billion in 2009, he said.
Earlier Jefferson Default
When it entered court protection, Jefferson County, home to Birmingham, Alabama’s most-populous city, added its general-obligation bonds to $3.2 billion of sewer debt that went into default in 2008, Lehmann said. This quarter’s total may rise with the addition of $300 million to $400 million owed by Harrisburg, Pennsylvania’s capital, which declared bankruptcy last month. Lehmann said he hasn’t included Harrisburg because its Chapter 9 filing has been disputed.
Municipalities that enter bankruptcy under Chapter 9 of the U.S. Bankruptcy Code can get relief from paying holders of their debt as they restructure.