Bankruptcy is no laughing matter and it gets a whole lot more serious when it comes to entire cities or counties admitting they don't have the funds to pay their bills.
Jefferson County, Ala., which includes the state's largest city, Birmingham, voted Wednesday to file the largest municipal bankruptcy in U.S. history, the Wall Street Journal reported, after negotiations with the holders of more than $3 billion in bonds for a sewer project reached an impasse.
Jefferson County is the fourth municipality to file for Chapter 9 bankruptcy in 2011, and its announcement comes just a month after Pennsylvania's capital, Harrisburg, filed for bankruptcy after racking up $300 million in debt from a trash incinerator project. Boise County, Idaho, and Central Falls, Rhode Island, also filed for bankruptcy this year.
The nearly back-to-back financial failings of two big municipalities raise serious questions about the state of public finances. Has the debt disease afflicting the federal government finally polluted municipalities farther downstream? Is this the beginning of a trend in bankruptcies and municipal bond defaults?
Not so much.
Most experts agree that recent events in Jefferson County and Harrisburg are anomalies, and a Meredith Whitney-esque municipal market meltdown is not likely to occur. Back in December, analyst Whitney controversially tied state and local budget troubles to "hundreds of billions" of dollars in municipal defaults, a claim that hasn't, and probably won't, materialize, according to experts.
While Jefferson County's filing will go down as the largest municipal bankruptcy on record to date, issues in Jefferson County don't reflect the overall picture of state and local governments. "Jefferson County is one of a very small number of municipalities across the country that are in such dire circumstances that they have chosen to go the route of bankruptcy," says Naomi Richman, managing director of U.S. public finance at Moody's.
On the contrary, analysts have been somewhat surprised at the resilience of state and local governments as a whole in the wake of the financial crisis. "We've been gratified at how well state and local government has managed through this crisis," says Alan Schankel, managing director and head of fixed income research and strategy at Janney Montgomery Scott. "That's the underlying story—state and municipal government has risen to the occasion."
Although concerns of widespread bankruptcies and defaults may be unfounded, challenges still exist for government entities across the nation. Moody's maintains a negative outlook overall for the government sector, citing mounting budget pressures due to the stagnant U.S. economy. Sinking home values have taken a big bite out of many municipalities' revenue streams, leaving them to stop up the budget gap in other ways.
Still, it's not a causal relationship, Richman says. "The overwhelming majority of local governments in the United States are investment grade, credit safe, they pay their debt on time," she says. "Bankruptcy is not on their radar screen."