Reuters: Bankruptcy News: UPDATE 1-Strong state oversight helps U.S. municipal credit-Moody's

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UPDATE 1-Strong state oversight helps U.S. municipal credit-Moody's Sep 16th 2013, 20:14 Mon Sep 16, 2013 4:14pm EDT WASHINGTON, Sept 16 (Reuters) - State intervention can help the finances of U.S. local governments and boost their credit quality, even though it does not always stave off bankruptcy, said Moody's Investors Service on Monday. Cities' budgets continue to show the scars of the 2007-09 economic recession, and many have turned to their states for help. But with the state-appointed emergency manager for Detroit leading that city to file for bankruptcy and default on its debt, rating agencies and investors are weighing the value of state intervention. According to Moody's only Louisiana, Massachusetts, New Jersey, North Carolina and Rhode Island provide "strong" support to local governments, becoming "intimately involved in the maintenance of the financial position of a municipal entity, with the goal of avoiding or remediating financial distress." In contrast, 28 states have "neither formal powers to intervene on behalf of a municipality nor a track record of taking action to alleviate financial distress." Because education is a core function of state governments, school districts receive more support. Moody's found that 14 states provide "strong" support for school districts, and 16 provide no support. Strong state support helps local governments provide essential public services and also boosts their credit quality, Moody's said, noting a state's commitment to oversight does not hurt that state's credit quality. The agency said it tends to assign higher ratings to troubled governments in states with strong oversight. Defaults on general obligation debt have recently occurred in states with limited or no financial oversight, it added. Still, state intervention does not directly prevent defaults and bankruptcies, Moody's noted. Case in point: Detroit. Michigan had provided strong support to its municipalities, monitoring their finances and avoiding defaults by appointing emergency managers, according to Moody's. The bankruptcy filing and debt default by Detroit, Michigan's largest city, came under the guidance of state-appointed emergency manager Kevyn Orr. "It remains to be seen whether the decision of Detroit's state-appointed emergency manager to file for bankruptcy, default on debt and propose deep losses to bondholders is because of Detroit's unique weaknesses or a harbinger of a policy change that will weaken its oversight program for other cities as well," it said. In March, Michigan enacted a new oversight law known as Public Act 4 that allows local elected officials to choose among having an emergency manager, turning to a neutral party in arbitration, entering a consent agreement to fix the government's finances, or filing for Chapter 9 bankruptcy protection. Michigan has had an emergency manager law for 20 years, but in 2011 voters repealed an overhaul that had given managers more power over cities' finances. "Whether an earlier appointment of an emergency manager would have averted a debt service default is debatable. Certainly, the uncertainty surrounding the legality of Public Act 4 created significant delays in implementing an effective plan, delays which allowed the city's already weak financial position to deteriorate," Moody's said. Moody's also said that recent California legislation to impose mediation on local governments seeking bankruptcy had "provided a path to bankruptcy and default" for both Stockton and San Bernardino. Link this Share this Digg this Email Reprints

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