Buffett says muni bankruptcies set to climb as stigma lifts

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.

The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.

“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview today on “In the Loop with Betty Liu” on Bloomberg Television. “The very fact they do it makes it more likely.”

Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped sales- and property-tax revenue.

“Once people find that the city works the next day, it makes it easier for the city council next time they have a problem with pensions — or whatever it is — just to say, ‘well, we’ll declare bankruptcy,’” said Buffett, whose company is based in Omaha, Nebraska.

No Precipice

He said the nation isn’t on the brink of hundreds of billions of dollars in defaults, as banking analyst Meredith Whitney predicted in 2010.

“I don’t think we’re at the precipice,” Buffett said. “People will use the threat of bankruptcy to try and negotiate, particularly pension contracts, with their employees.”

Berkshire held municipal bonds valued at about $3 billion as of March 31, or about 9 percent of the fixed-maturity portfolio, according to a regulatory filing. That’s down from about $3.6 billion at the end of 2010. The company also had as much as $16 billion at risk in derivatives tied to such debt at the end of the first quarter, the filing shows.

The billionaire predicted a “terrible problem” for municipal bonds in coming years in testimony to the U.S. Financial Crisis Inquiry Commission in June 2010.

‘Too Early’

Forty-two municipal issuers have defaulted for the first time in 2012, down from 68 in the same period last year and 83 in 2010, according to Municipal Market Advisors.

“It’s too early to say that there’s a lack of stigma,” John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York, said in a phone interview. “Municipal bankruptcy is a gut-wrenching process. There’s nothing easy about it.”

Tax-exempt mutual funds have continued to attract investors, who added about $653 million to U.S. municipal bond funds in the week through July 11, the most since mid-May, Lipper US Fund Flows data show.

Yields on 10-year benchmark munis fell to 1.77 percent as of noon in New York, the lowest since May 15, according to Bloomberg Valuation data.

–Bloomberg News–