NCPA - National Center for Policy Analysis

New Risks Emerge in Munis

November 12, 2010

The housing crisis was fueled by cash-strapped homeowners who walked away from their mortgages.  Some analysts and investors now are worried about the same problem happening with debts of cities and towns, says the Wall Street Journal.

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.

In deciding not to return $23 million to investors who paid for the steam plant, Menasha is behaving like homeowners who decide not to sink more money into properties worth less than their mortgage, regardless of the consequences to their credit profile, says the Journal.

  • In 2005, Moody's assigned its highest rating to the steam plant's $12.7 million "revenue bond anticipation notes."
  • Moody's dropped its credit rating by one notch when the steam plant borrowed an additional $11.5 million.
  • With the city abandoning the project rather than laying off additional workers, Moody's rates the debt as junk.

Another trouble spot for investors:  Buena Vista, Va., a city of about 6,200 on the edge of the Blue Ridge Mountains that didn't appropriate money in its 2011 budget to make debt payments on $10 million in bonds that financed a municipal golf course, according to Moody's Investors Service.

  • Moody's downgraded Buena Vista's credit rating in June to junk from "low credit risk," citing "uncertainty about the city's willingness to meet its obligations."
  • Of 54 defaults on Moody's-rated municipal debts from 1970 to 2009, about 78 percent were in stand-alone housing and health care projects.

Source: Michael Corkery, "New Risks Emerge in Munis," Wall Street Journal, November 10, 2010.

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