John Moorlach Who Called Orange Country Bankruptcy Says Up to 10 More Coming in 2009

John Moorlach said in 1994 that Orange Country was headed for bankruptcy and six months later they files.  Now, he says that at least 10 municipalities are headed for trouble in 2009.

Moorlach, who is now chairman of the Orange County Board of Supervisors spoke mainly about California municipalities, which are suffering badly from the housing downturn and the banking crisis.  Outside, other cities and towns are suffering according to Bloomberg:

“In an environment where the federal government needs to stimulate the economy, keeping states from being forced to take steps that are rapidly and severely restraining will become absolutely essential,” Friedlander wrote. He could not be reached for comment yesterday.

Two California cities, Rio Vista, with a population of 8,000, and Isleton, a 10th as large, have said budget gaps and debt loads may force them into insolvency. Likewise, Jefferson County, Alabama, which is trying to restructure $3.2 billion in sewer debt, has considered what would be the largest U.S. municipal bankruptcy."

The most such filings in a year is 104 in 1940 at the end of the Great Depression, according to a 1964 study, “The Postwar Quality of Municipal Bonds.” Since 1980, the record is 18 in 1987, the year of the Oct. 19 stock-market crash."

Generally, cities and towns are able to avoid bankruptcy by cutting expenses and services.  Even during the Great Depression only 104 bankruptcy filings were made by municipalities.  Still, that's small consolation if you happen to be holding their bonds.

How do you avoid holding munis in a distressed municipality? 

  • Take a look at the rating and see if it has been downgraded.  This is a place to start but be aware that ratings agencies are often asleep at the wheel, one of the factors that precipitated the banking crisis. 
  • Do some investigative work yourself if you have some financial ability.  Check EMMA, a free SEC run disclosure site for municpal bonds.  There you can read the offering prospectus and get a better sense of the city and municipality. 
  • Read up on the municipality.  Is it facing financial stress?  Is it in an area that is being hard hit by the banking crisis?
  • Figure out the kind of bond you have.   There are two main types of municipal bonds – general obligation bonds and revenue bonds. General obligation bonds are repayed through tax revenue and if tax revenue falls due to falling home prices or foreclosures, this can impact the ability of the municipality to meet its interest payments.  Revenue bonds are generally repayed out of the income from the project being financed.
  • Take a look at municipalitie's financials and see what their debt load is.  Even wealthy communities can run into trouble if they've committed too much money to capital projects.

For those that are willing to take a bit of risk, the yields on munis can be quite attractive.  Some Munis are paying 6.5% - 7% tax free.   

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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