Moody’s rated
the debt of 30 cities, towns, villages, counties, and school districts as
“speculative grade,” up from 25 last year.
A
speculative-grade rating for a local government means, at best, its debt is
risky and, at worst, it could end in default. 24/7 Wall St. looked at 13 of the
riskiest local governments that may be on the verge of
bankruptcy.
In an interview
with 24/7 Wall St., Moody’s Managing Director and Chief Credit Officer of U.S.
Public Finances, Anne Van Praagh, explained that the number of cities, counties
and towns that default on some or all of their debt is
growing.
She attributes
this to “a significant amount of credit pressure, sluggish economic recovery,
and cities not being able to grow out of their problems this time around.” She
added that many cities see defaulting as the only way to avoid total economic
disaster.
Perhaps the best
example of this is Stockton. Earlier this year, the city of Stockton,
California, defaulted on its debt and filed for bankruptcy. For analysts at
ratings agency Moody’s, it marked a growing trend in local governments. Cities,
which have historically been nearly flawless on their obligations, are opting to
default on their debt because of financial troubles.
Different
circumstances brought each government to this point. However, a few underlying
causes are shared. In some cases, governments severely mismanaged their debt:
they borrowed based on unrealistic projections of expenses. In other cases, the
economic downturn hit particularly hard, weakening revenue. For some local
governments, it was a combination of factors.
A weak economy
with a fragile or shrinking tax base is one of the worst problems a local
government trying to balance its budget can face. In Detroit, the population has
fallen by roughly half in the past 50 years, including a 25% drop in the past
decade alone. Unemployment is well into the double digits, and per capita income
has been steadily declining. All these factors make it extremely difficult to
continue raising revenue to service its debt.
Moody’s expects
more local governments will be downgraded in the future. In its report, the
ratings agency explained, “The credit pressures will continue to exert
themselves on virtually the entire local government sector. For municipalities
unable to adjust to the new environment, downgrades into speculative grade are
unavoidable realities.” Huffington Post
High housing
prices in large U.S. cities are decreasing income mobility and ultimately
hurting the U.S. economy, according to a new study by Daniel Shoag, associate
professor of Public Policy at Harvard's Kennedy School, and his colleague Peter
Ganong. Laborers are
being priced out of larger cities like San Francisco, where housing prices are
high, and migrating to smaller cities like Phoenix where housing prices are
cheaper. This has created a two-tier society: high-skill, high-wage workers
living in large, metropolitan cities and low-skill, low-wage workers coalescing
in economically depressed regions. This phenomenon slows economic growth, Shoag
argues, because one's total income impacts national GDP. Since 1980 the
rate of income convergence has been stagnant. The average income of U.S. workers
has remained flat for the past 30 years and the migration of low-skilled workers
across states has also slowed significantly. The Daily
Ticker
AHT/ARA
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