Reuters: Bankruptcy News: UPDATE 1-Risks of California muni bankruptcies rising -Moody's

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UPDATE 1-Risks of California muni bankruptcies rising -Moody's Aug 17th 2012, 16:10 Fri Aug 17, 2012 12:10pm EDT Aug 17 (Reuters) - California likely will experience "a greater share" of defaults and bankruptcies than other areas of the country, Moody's Investors Service said on Friday. There have been three prominent municipal bankruptcy filings in the Golden State since June, including that of Stockton, reflecting a broad pattern of fiscal stress, Moody's said. "However, we expect the number of filings and defaults will be low relative to the 93 Moody's rated and 389 unrated city credits in California," the credit agency said in a report. The risks for bondholders are greater with issuers whose credits are not rated. Many counties, cities and towns around the nation are struggling with the rapidly rising costs of pensions and health benefits for their workers. Their financial problems are heightened by the still-fragile economic recovery, which is restraining revenue growth. The remedies California's municipalities can employ are more limited than those of some other states. Moody's noted California's constitution restricts the ability of localities to issue general obligation bonds, and raise property tax rates. Further, the state has a "home rule" policy. Such policies give municipalities considerable independence from the state government. And in 2011, California enacted a law that allows municipalities to file for bankruptcy after a 60-day period of mediation talks with creditors. Some of the most vulnerable California localities are located inland, "within the Empire and Central Valley, where cheap financing and speculative residential and commercial development during the boom years resulted in high foreclosure rates and depressed prices," Moody's said. These factors reduce property tax revenue. The credit agency underscored how the handful of bankruptcy filings around the nation is altering the traditional understanding of the municipal market's default risks. "This inability and unwillingness to honor obligations to bondholders is relatively new in modern day U.S. public finance and still remains rare," the credit agency said. Link this Share this Digg this Email Reprints

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