The Week in Public Finance: Bankruptcy Scares, Superdowngrades and Shopping in Pennsylvania

A roundup of money (and other) news governments can use.
by | April 24, 2015

For past editions of The Week in Public Finance column, click here.

No more coddling

Recent developments in Illinois and New Jersey have made it easier for cities to file for bankruptcy, according to a Fitch Ratings analysis released April 20. That’s bad news for bondholders, who generally lose their investment in a bankruptcy. It’s also bad news for cities still be hoping that their state will come to their aid. In Illinois, Gov. Bruce Rauner has proposed granting local governments the authority to file a Chapter 9 petition. (Current Illinois law bars local governments with populations over 25,000 from filing for bankruptcy.) Rauner also raised alarm when he said this week that he fears Chicago Public Schools may need bankruptcy as a solution to its large budget imbalance. In New Jersey, Gov. Chris Christie's recent decision to appoint corporate restructuring experts to assist Atlantic City in resolving the city's fiscal crisis is a departure from the state's strong history of helping local governments avoid bankruptcy. Moody’s Investor’s Service also downgraded New Jersey’s credit rating last week to A2, making it the second-lowest rated state (behind Illinois) by Moody’s.

Fitch doesn’t like where this is going. “We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations,” the agency said, would be more productive than focusing on easing laws or practices to allow bankruptcy.”

The prosperity gap extends beyond wages

While the number of superdowngrades of government credits are declining this year, Municipal Market Analytics reported that the ones that do happen are a lot worse than those that occured in previous years. So far this year, nearly one-third of the governmental superdowngrades (credit rating downgrades of multiple notches) were related to Puerto Rico, Atlantic City, N.J., and Wayne Co., Mich. “Each of these issuers has long been on the market’s radar screen so the surprise factor that often occurs with such downgrades was likely muted,” writes analyst Matt Fabian in the firm’s weekly outlook. Still, he added, the pace of the deterioration has picked up in recent months. “This accelerated slide is not uncommon for governments with long‐term fundamental challenges such as significant population and/or employer loss, high unemployment, persistent revenue decline and/or sticky fixed costs that face narrowing liquidity,” he went on. Such strain can lead a government to do thing that undermine long term-sustainability and make their credit worse, such as increasing borrowing to cover costs.

Overall, superdowngrades by Moody’s and Standard & Poor’s declined in 2014 to 112, Fabian reported. That total is down about 55 percent from the high in 2012 and is on pace to slow further in 2015 (with 32 actions through early April). In other positive news, Fitch reported that its U.S. public finance rating upgrades outnumbered downgrades for the fourth straight quarter.

Going shopping

Pennsylvania is looking for a deal anywhere it can be found. (Which makes sense, considering the state’s noted budget deficits.) The commonwealth’s Treasury department this week announced it completed the state’s first-ever competitive bidding process to select a law firm to provide bond counsel legal services. (Bond counsels help governments navigate the process of selling bonds, among other things.) Saul Ewing was the big winner from 17 total bids and Treasury estimates it will save more than a third on future legal fees by opening up the process to bidding. The move was in response to the governor’s call for state agencies to use competitive procurement more often to save money.