Municipal Bankruptcies: Were Not Going To Take It Anymore

Assured Guaranty Ltd., the only active municipal bond insurer, said it will reconsider guaranteeing public bonds in states without procedures for reviewing and approving local bankruptcy petitions. “Local governments must recognize their responsibilities to live up to the promises made by current and former duly elected officials,’’ Assured Chief Executive Officer Dominic Frederico said on a conference call with investors and analysts. “The term full faith and credit must have meaning and challenges via bankruptcy or other legal maneuvers to negotiated contracts can’t be accepted.’’ Assured backed $731.8 million of debt sold by Jefferson County, and guaranteed or reinsured debt sold as part of an incinerator expansion in Harrisburg, Frederico said the guarantor was “disappointed’’ with Jefferson County commissioners’ decision to file for bankruptcy after a tentative deal struck in September that would have cut the amount owed on debt tied to the county’s sewer system failed. He blamed “local politics’’ in Harrisburg for impeding “practical and fair solutions’’ to the city’s financial problems.”

“New Jersey won’t approve Chapter 9 bankruptcy filings by distressed municipalities, according to Thomas Neff, director of the state Division of Local Government Services. New Jersey law requires state approval of all municipal bankruptcies, Neff said in an interview at a conference of mayors in Atlantic City. His division would look to use state aid and possible takeovers of city finances to avert such filings, he said. “It’s more likely to snow in July than for us to approve a bankruptcy,’’ Neff said. “I can’t even see myself posting it for consideration.’’

Many readers have asked for a perspective on the Chapter 9 Municipal Bankruptcy of Jefferson County, Alabama. Others have e-mailed us concerning Harrisburg, Pennsylvania. Over the course of the year we have written about these situations. Our view remains that these are one-off events brought about by failures of the local political systems and disappointing governance. Sometimes corruption is added to that toxic combination.

We argue that most Munis are mostly safe most of the time. The key is to research them and understand the construction of each of these idiosyncratic credits.

Specific bankruptcies, like Jeffco and Harrisburg, are the final actions of a process that began several years previously. They were the result of poor decision making on the part of elected public officials. However, not every bad Muni deal ends in a bankruptcy. Many can be worked out. In those cases the political officials realize that avoidance of bankruptcy is “less worse” than choosing what appears politically to be an easy way out; they are mistakes that were made either by the elected officials or others involved in the process.

Portions reprinted from our friends at Cumberland Advisors