NEW YORK - While enterprise risk still claims most of the defaults in the U.S. public finance sector, a new pattern may be emerging, according to the latest default study of the sector by Moody's Investors Service.
"Although we have seen large entities like Jefferson County in Alabama seek bankruptcy protection, most bankruptcy filings or defaults in 2011 came from small cities struggling to sustain general government ervices," said Anne Van Praagh, Moody's chief credit officer for public finance. "They include the burdens of non-debt obligations, including pensions, entitlements, and salaries that have grown out of proportion to the resources available to pay for them."
Most rated defaults since 1970 occurred in the healthcare and multifamily housing sectors, which together account for just under 70% of all events of public finance default. The combined principal amount of debt affected, however, was just 5% of the total in the record. Only five general obligation (GO) bond issuers, including cities, counties and school districts, defaulted on GO bonds in the 41-year study period and only one GO issuer out of approximately 9,700 rated by Moody's has defaulted on bonds in the last three years. Two municipal governments defaulted on lease appropriation bonds in the study period.
"While we expect the vast majority of municipal issuers to continue to pay their debts, we also expect a very small but growing number of general government issuers to default on their bonded debts," said Van Praagh.
Eleven Moody's-rated municipal bonds defaulted in 2010 and 2011, the most recent period in the study, which examines defaults in the sector dating back to 1970. Since the start of the financial crisis in 2008, 18 Moody's-rated issuers have defaulted.
The statistics for 2010 and 2011 reflect an average of 5.5 defaults per year compared with an average of 2.7 annual defaults over the period 1970-2009. The number of municipal defaults remains low in absolute terms with only 71 Moody's-rated municipal bond defaults since 1970. In contrast, Moody's currently rates over 17,000 municipal bonds.
"Municipal debt defaults will remain infrequent and isolated events, rather than systemic traumas, despite unprecedented credit pressure," said Vice President -- Senior Analyst Merxe Tudela, author of the report. "Municipal governments are feeling that pressure from a sluggish U.S. economy burdened by persistently high unemployment, depressed real estate prices, and low income growth."
Unlike corporations and national governments, only a small portion of rated municipalities have refinancing risks, and debt service typically represents a low percentage of municipal expenditures, providing municipal issuers with little incentive to default.
"Municipal issuers have enjoyed generally high ratings over the past 41 years, a period in which the U.S. economy avoided a major depression and the U.S. government did not fall into a debt crisis," said Tudela. "The likelihood of either of these is greater now than at any time since World War II, and would result in a substantially higher rate of default incidents."