How bad are municipal bankruptcies really?

How bad is the municipal bankruptcy outlook? It's difficult to predict, however we can evaluate the past. As it turns out, only a small fraction of cities have filed for bankruptcy, despite the recent flurry of filings. Most filings are actually from within departments inside the city.

LOS ANGELES, CA (Catholic Online) - Since January, 2010, there have been 36 municipal bankruptcy filings, however only eight cities have actually filed for bankruptcy.

-- City of Detroit
-- City of San Bernardino, Calif.
-- Town of Mammoth Lakes, Calf. (Dismissed)
-- City of Stockton, Calif.
-- Jefferson County, Ala.
-- City of Harrisburg, Pa. (Dismissed)
-- City of Central Falls, R.I.
-- Boise County, Idaho (Dismissed)

The other 28 bankruptcies are from individual entities and special districts within the cities. Utility authorities and sanitary districts account for the majority of filings. Sanitary districts alone made up a third of such.

It's important to realize that municipal bankruptcies are still rare. There's concern that the Detroit bankruptcy could harm the municipal bond market. Cities rely on municipal bonds to raise money and sometimes to avoid bankruptcy. If Detroit can go bankrupt, then so can many other cities.

Detroit is the largest city to date to go bankrupt.

Also, not all cities can go bankrupt. Differences in state laws forbid some cities and municipalities from going bankrupt with various measures in place to provide relief.

Still, the number of bankruptcies remains quite low, with less than .06 of all cities having filed for bankruptcy of some degree, since January 2010. Despite this, investors may fixate on the possibility of bankruptcy which may depress the municipal bond market.

Some bankruptcies can be rejected. At least three of the eight cities listed above, had their bankruptcy filings rejected.

Municipal bankruptcies are a sign of the times, with our liberal tax-and-spend policies catching up with cities across the nation. However, despite these problems, many cities have had success in cutting spending and working with creditors to resolve difficulties before bankruptcy becomes a possibility.

So just because Detroit went bankrupt, does not mean other cities will immediately follow suit. However, the bankruptcy of any major city, especially one as important as Detroit, is worthy of concern.

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