Bankruptcy decisions by Stockton and San Bernardino in California signal more cities may be losing their willingness to pay debt obligations, Moody’s Investors Service said.
“The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities — in California and, perhaps, elsewhere — will begin to view debt service as a discretionary budget item, and that defaults will increase,” Anne Van Praagh, a managing director at the ratings company, said in a report Thursday.
San Bernardino will become the latest municipality in California to seek court protection from creditors after the City Council voted for an emergency bankruptcy Wednesday. It would join Stockton, an agricultural center of 292,000 east of San Francisco, and Mammoth Lakes, a mountain resort town of 8,200, by entering bankruptcy proceedings. Stockton is the largest U.S. city to take the step.
San Bernardino and Stockton are examples of political unwillingness to place interest payments to bondholders ahead of essential governmental services amid dwindling cash, according to Moody’s. As fiscal strains mounted, San Bernardino almost failed to cover its payroll last month. In Stockton, the police force shrank 26 percent in four years as murders more than doubled.
Cities will probably still avoid defaulting or seeking bankruptcy protection, and instead cut spending, raise taxes or use reserves, Moody’s said.
From 1970 to 2011, only one of the 71 Moody’s-rated municipal defaults involved a local government that chose that route due to lack of willingness rather than ability to pay, according to the report. Most involved enterprise projects such as convention centers and sports arenas.
Scranton, Pennsylvania; Moberly, Missouri; and Wenatchee, Washington, have also opted to miss debt payments even though they may have had the resources to make them, according to Moody’s.
“Events of the last few years prompt us to review our long-held assumptions about municipal behaviors and attitudes toward debt repayment,” Van Praagh said in the report. “Even a slight increase in bankruptcy filings would mark a significant departure from the historical pattern.”
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