Rating cuts in the $3.7 trillion municipal-debt market will outpace upgrades by “a wide margin” as lagging property-tax revenue and persistent labor costs stress local governments, according to Fitch Ratings.
Chapter 9 bankruptcy filings and defaults may extend beyond California, where Stockton, Mammoth Lakes and San Bernardino each sought court protection in the past two months, Fitch said today in a report. Twelve percent of local-government rating actions in 2012 through July were reductions, compared with 2 percent for upgrades, according to the New York-based company.
“The consideration of municipal bankruptcy as a viable option for relief in itself calls into question an issuer’s commitment to repaying debts,” Fitch analysts including Dan Champeau said in the report. “Chapter 9 filings on a broader scale would represent a marked departure from municipal governments’ long demonstrated willingness to avoid default and bankruptcy.”
Local governments have been slow to recover from the 18-month recession that ended in June 2009, with revenue falling for six straight quarters, according to a report from the Nelson A. Rockefeller Institute of Government in Albany, New York. Cities and counties receive about 33 percent of their revenue from state transfers and 29 percent from property taxes, according to the Fitch report.
School districts, counties, and cities that provide social services receive the most state aid, and are most at risk of rating cuts, Fitch said.
Moody’s Investors Service said last month that localities may view debt service as “a discretionary budget item,” which would increase the chances of municipal defaults.
Investors have ignored the filings in California, instead demanding the least since 2008 to hold the debt of issuers in the state. The extra yield on 10-year California state and local general-obligation bonds compared with top-grade debt narrowed to 0.76 percentage point on Aug. 16, the least since December 2008, according to data compiled by Bloomberg.