The Handbook of Municipal Bonds

CHAPTER 44

A History of Modern Municipal Defaults

James E. Spiotto Partner Chapman and Cutler LLP

 

 

 

There is a saying: “While doctors bury their mistakes, in municipal financing, they are refunded.” There comes a time, however, when certain financial problems cannot be refunded. Under present economic conditions, the probability has increased that many municipalities will be faced with significant cash flow difficulties and ensuing financial crisis. In such situations, the municipality may consider requesting state support, curtailing spending and services or seeking a debt adjustment to resolve the fiscal emergency. If the municipal crisis is not addressed quickly and effectively, both the state and the municipality could face acrimonious and agitated credit markets. The prolonged crisis could be injurious to the state and municipal credit and harmful to the achievement of an economic solution to the situation.

ANALYSIS OF DEFAULTS OF MUNICIPAL DEBT IN THE UNITED STATES

Causes of Default

In order that the past not be repeated, it is helpful to review the causes and nature of prior defaults. While each default by a local governmental body has unique factors (specific problems of economics, industry or tax revenue of the time and place), there are also notable themes that can be guides for the future. The usual causes of defaults by municipalities in the United States are described below.

Note: A more detailed discussion by the author appears in M. David Gelfand (ed.), ...