Moody's says more California cities at risk of bankruptcy, puts bondholders at risk

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8/17/12, "Moody's: More Calif. cities at risk of bankruptcy," AP, via LA Times

"One of the nation's top credit rating agencies said Friday that it would begin a wide-ranging review of municipal finances in California because of what it sees is a growing threat of increased city bankruptcies and bond defaults.

Moody's Investors Service issued a report saying that the growing fiscal distress in many cities in the nation's most populous state was putting bondholders at risk.

It noted that some municipalities were considering bankruptcy as a new strategy to address budget deficits and avoid obligations to bondholders, an emerging dynamic that could have ripple effects throughout the investment community.

Three California cities — Stockton, San Bernardino and Mammoth Lakes — have filed for bankruptcy this year. Moody's said they were not likely to be the last.

"To summarize, we expect … more bankruptcy filings and bond defaults among California cities reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps," the report said....

The report also noted the potential for ratings downgrades to fiscally distressed cities, counties, school districts and special districts throughout the state.

Lower bond ratings would increase borrowing costs for those entities at a time when many of them are struggling financially because of a steep drop in tax revenue.

Because of that, Friday's report is raising alarm in many California cities where leaders fear that a crisis of confidence in the municipal bond market could hinder their ability to borrow for needed projects....

San Jose has closed libraries and laid off police officers to cut costs, and residents voted overwhelmingly this summer to cut the pension benefits they give city workers. But although the city is taking steps to reassure investors of its fiscal health, there is frustratingly little it can do to control larger fears about the municipal bond market, (San Jose spokesman) Vossbrink said."... via Drudge

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