WASHINGTON — Municipal default rates continue to be elevated but are still low compared to other sectors such as corporate finance, Moody's Investors Service said in a report released Wednesday.
There were seven Moody's-rated municipal defaults in 2013, which brings the total number of defaults since the recession began in early 2008 to 30. Defaults have averaged 5.0 per year since the recession started, which is higher than the average of 1.3 defaults per year from 1970 to 2007, Moody's said in the report, its annual review of municipal defaults.
Still, the rate of defaults within one year is very low, at an average of 0.03% for the last five years. For the 1970-2007 period, the comparable average rate was 0.01%, Moody's said.
Three of the 2013 Moody's rated municipal defaults were from the city of Detroit: its unlimited-tax and limited-tax general obligation debt and certificates of participation. The Detroit Academy of Arts & Sciences charter school, which is located in the motor city but otherwise is unrelated to its bankruptcy, also defaulted, as well as the Pontiac City School District in Michigan, which became the first ever default of a Moody's rated school district. Other defaults were in Jefferson County, Alabama, and the West Penn Allegheny Health System in Pennsylvania.
"The Detroit bankruptcy, by virtue of its scale and the range of credit and related legal issues it poses, is shaping up as a major watershed event, and the evolving bankruptcy cases in Stockton and elsewhere in California also will establish industry benchmarks for 'service insolvency' where governments are forced to choose between essential services and honoring debt and other long-term obligations," the report said.
While 65% of Moody's-rated municipal defaults since 1970 have been in the health care and multi-family housing sectors, general government defaults and bankruptcies have been on the rise in recent years.
Moody's expects that there will continue to be few municipal defaults, noting that the outlook for the local government sector was revised to stable from negative in 2013. General governments have been stabilizing despite revenue and spending pressures and sluggish economic recovery. However, some local governments may be further constrained by rising pension costs, the rating agency said.
Several trends that Moody's identified last year appear to be holding true for 2014, Moody's said.
One is that stress for local governments is subsiding but pressures, such as those from pensions and other post-employment benefits, remain.
Another theme is that rating changes will often occur in clusters, since groups of related governmental credits are broadly correlated due to financial, economic and functional links. This theme has been evident in southeastern Michigan, the rating agency said.
Additionally, recoveries from general government defaults, or how much money bondholders are getting back on defaulted bonds, is trending lower. Recoveries may vary widely across creditors with the same type of security for their bonds, Moody's said.
The rating agency also said the outcome of municipal default and bankruptcy is unpredictable. Anne Van Praagh, Moody's managing director and chief credit officer for public finance, said that the rating agency will be looking closely at how debt is treated compared to pensions and how different types of debt stack up with each other as municipalities exit bankruptcy.
