Stockton, California, filed for bankruptcy in July 2012



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The US communities most in
danger of going bankrupt

5 December 2012: In October 2012, Moody’s, the US credit rating agency, published a report which rated the debt of 30 US cities, towns, villages, counties and school districts as ‘speculative grade’. A year ago only 25 communities were given speculative grades.

In an interview with the online investment newsletter 24/7 Wall St., Moody’s Managing Director and Chief Credit Officer of US Public Finances explained that the number of cities, counties and towns in the US that default on some or all of their debt was growing. She attributed this to “a significant amount of credit pressure, sluggish economic recovery, and cities not being able to grow out of their problems this time around.” She added that many towns and cities see defaulting as the only way to avoid total economic disaster.

Based on Moody’s report on US speculative-grade local governments for 2011, 24/7 Wall St. reviewed the 13 towns, cities, villages, and counties with a credit rating of Ba2 or worse.

US communities in danger of going bankrupt

Community
State
Credit rating*
Comments
Stockton California Caa3: Speculative grade; Rated as poor quality and very high credit risk. Stockton filed for bankruptcy in June 2012
Jefferson County Alabama Caa3: Speculative grade; Rated as poor quality and very high credit risk. Jefferson county filed for bankruptcy in November 2011
Pontiac Michigan Caa1: Speculative grade; Rated as poor quality and very high credit risk. Moody's projects fiscal 2012 deficit of $8.4 million
Detroit Michigan B3: Speculative grade; Judged as being speculative and a high credit risk. Detroit credit rating under review for a further downgrade
Central Falls Rhode Island B2: Speculative grade; Judged as being speculative and a high credit risk. Central Falls emerged from bankruptcy in September 2012
Woonsocket Rhode Island B2: Speculative grade; Judged as being speculative and a high credit risk. Moody's report poor management and imprecise accounting
Riverdale Illinois B2: Speculative grade; Judged as being speculative and a high credit risk. Riverdale is expected to report a deficit of $1.5 million for fiscal 2012
Salem New Jersey Ba3: Speculative grade; Judged as being speculative and a high credit risk. A commercial property lease deal has become a liability which is disproportionate to the city's size and ability to pay.
Harrison New Jersey Ba2: Speculative grade; Judged as being speculative and a high credit risk. Since October 2011, the town's credit rating has improved from Ba3 with a negative outlook to Ba2 with a positive outlook.
Menasha Wisconsin Ba2: Speculative grade; Judged as being speculative and a high credit risk. In 2010, nearly 20% of the city's budget was devoted to paying off debt, which was the second-largest expense on the balance sheet in 2010.
Strafford County New Hampshire Ba2: Speculative grade; Judged as being speculative and a high credit risk. Moody's changed its outlook from last year for the county from negative to stable.
Le Center Minnesota Ba2: Speculative grade; Judged as being speculative and a high credit risk. In February 2012, Moody's downgraded Le Center from A1 to Ba2, with a negative long-term outlook.
Wenatchee Washington State Ba2: Speculative grade; Judged as being speculative and a high credit risk. In December 2011, the Greater Wenatchee Public Facilities District defaulted on $42 million of debt associated with the Town Toyota Center, a multi-purpose arena.
Source: Moody’s Investors Service and 24/7 Wall St.

* According to Moody's, the purpose of its ratings is to "provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged". Aaa to Baa3 are described as investment grade with low to moderate credit risk. Ba1 to C are described as speculative grade with significant credit risk or already being in default.






Moody's rated the debt of 30 US communities as 'speculative grade'


On other pages
Troubled US local government divided over benefits of fiscal control boards
In 2009, Moody’s Investors Service put all local governments in the United States on negative credit outlook. It was the first time such a blanket report was ever issued for cities, towns, counties, and school districts. To date, the negative outlook remains. It’s an understatement to say that local governments have been caught up in unfavorable financial and market trends since the economic downturn began in 2008. Local governments have cut services and laid off workers, including police officers and school teachers. The Wall Street Journal estimates that local government personnel reductions add a full percentage point to the nation’s unemployment rate.

Most publicity on struggling local governments in the US has focused on the bankruptcies of three California cities - Stockton, San Bernardino and Mammoth Lakes. Twenty-four states allow their local governments to file for bankruptcy protection under various circumstances. Bankruptcy is a quick fix. Bankruptcy, in most cases, does not require a local government to sell assets to pay its debt, reorganize its management, or restructure its revenue sources. Most states, including those that allow municipal bankruptcies, intervene to prevent an official bankruptcy by appointing a fiscal control board to actively manage the finances of the distressed local government. The goal of a control board is to bring fiscal stability by transforming the underlying governance process. More