Bridgeport, Conn., officials say filing for bankruptcy was prudent, but that route will prove too risky for most municipalities, according to a new report by Standard & Poor's Corp.
When the city filed for Chapter 9 protection two weeks ago, some market observers predicted that more and more withering municipalities across the country might seek the same route for protection as the economy chokes their budgets.
In the June 17 edition of CreditWeek, Standard & Poor's acknowledges that some officials of local governments are now considering court-imposed solutiosn to budget restructuring before they have exhausted all alternatives.
"Declining intergovernmental aid, greater federal service mandates, and mounting taxpayer resistance to tax-rate increases have compounded the difficulty in maintaining balanced budgets," the agency reported.
"The structural problems of the last decade, which were disguised by rapid economic growth, are now uncovered by recessionary pressures," it continued. "In contrast to past economic downturns that precipitate municipal insolvency, some presently solvent governments may consider deliberate protection under the bankruptcy code."
But Standard & Poor's also believes there are significant disincentives that will dissuade most cities from moving down the bankruptcy trail.
"As municipal leaders struggle with some very difficult challenges in public sector management, the great majority will conclude that the disruption in taxpayer, labor, and intergovernmental relations is not fully compensated by the short-term relief offered by Chapter 9 proceedings," the agency said.
Standard & Poor's also notes that municipalities may find the market less hospitable after a bankruptcy filing, and bank financing also may become more difficult.
Another high cost for local officials is the loss of control to court-appointed trustees or state supervisory authorities, the agency said. In the negotiations that follow bankruptcy, officials may find themselves in conflict with the needs of various groups, including taxpayers and municipal employees.
Standard & Poor's cited difficulties resulting from union contracts, which may be rejected in Chapter 9 proceedings if the court considers them burdensome. The move could result in strikes, lower worker productivity, and less flexibility at the bargaining table for officials next time around, according to the agency.
Municipal bankruptcies are rare, with most having occurred as a result of the Great Depression. From 1980 through the early part of this year, there have been only 69 municipal bankruptcies.
Market players are quick to point out that the Bridgeport incident is a small occurrence in terms of debt -- about $200 million bonds are at stake. But, they add, the outcome of the proceedings is important because the Bridgeport case is likely to set a precedent for municipal bankruptcy procedure.
"Politically, it's very important because the ramifications will probably set the status quo for proceedings across the country," one New York bond trader said. "It's a small amount of debt, but once a procedure becomes status quo, it's difficult to change it."
Municipal bankruptcy was adapted from corporate proceedings, but, in contrast, a municipality must elect to adjust its debts and cannot be forced into bankruptcy by its creditors. In some cases, local legislation prohibits bankruptcy as an option. Finally, unlike other types of bankruptcy, the government still retains possession of its assets and taxing capacity.