Weighing if San Bernardino portends a filings flood

Big incentive to avoid default, but many cities are backed into a corner

Jul 15, 2012 @ 12:01 am

By Jeff Benjamin

As the city of San Bernardino, Calif., teeters on the edge of bankruptcy, some see the glass as half empty, while others see the glass as three-quarters empty.

“In the state of California, you're going to see a lot more municipalities file for Chapter 9 bankruptcy because they simply don't have a choice,” said Brian Amidei, a managing director and partner at HighTower Advisors LLC.

The city council of San Bernardino, a city of 209,000 about 65 miles east of Los Angeles, voted to file for Chapter 9 bankruptcy protection last Wednesday.

Despite the fact that two other California towns have filed for bankruptcy protection in the past month, not everyone sees the same level of despair.

“We may have a few more of these happen, but the main point is that the municipalities need access to capital, and they know if they default on their bonds, they won't get that,” said J. Brent Burns, president of Asset Dedication LLC, which builds fixed-income separate accounts.

FRAUD A CULPRIT

He also pointed out that in the case of San Bernardino, fraud is a major culprit.

Mr. Burns said that it would be a mistake to assume that California, or the country as a whole, is poised for a flood of municipal bankruptcies.

Tom Dalpiaz, who manages $310 million worth of muni bond portfolios for Advisors Asset Management, also cautioned that the San Bernardino situation should be kept in perspective.

“As a portfolio manager, you hate to see this kind of stuff, but it is absolutely not the beginning of the breaking of the floodgates,” he said.

Of the 55,000 issuers of muni bonds, only about a half dozen have gotten close to defaulting, Mr. Dalpiaz noted.

jbenjamin@investmentnews.com Twitter: @jeff_benjamin

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