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Is Municipal Debt the Next Housing Crisis?

Ian Scott on Wednesday, November 10, 2010 at 4:15:32 pm

An article today’s Wall Street Journal highlights growing concern among investors about the creditworthiness of local governments.  As examples of municipalities that are failing to make payments on debt, the article cites the relatively small communities of Menasha, WI, Buena Vista, VA and Cicero, NY.

Here’s an excerpt:

For more than a year, Menasha, Wis., hasn't paid back about $23 million in principal for short-term notes tied to a failed steam plant, even though the deal's offering documents include a statement that the city would use tax revenue to cover any debt payments, if needed.

But that statement "was no guarantee" to repay the debt, says Edward Fuhr, a lawyer for Menasha, a small industrial city that has spent an average of $80,000 a month to fight investor lawsuits in three courts over the notes, which matured in September 2009.

The tangle underscores concern in the municipal-debt world about the longstanding assumption that local governments will do whatever it takes to repay their debts—including raising taxes—because failing to do so would make it more expensive or even impossible to turn to investors for future financing.

 While the article notes that "greatest default risk is in small municipalities with overleveraged projects," this trend should be a concern for all cities.

Read more at - New Risks Emerge in Munis

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