Surge in muni defaults seen unlikely

State and local governments are unlikely to experience a “material increase” in municipal defaults over the next three to five years, according to a study by Kroll Bond Rating Agency Inc. The study, released the week after Alabama's Jefferson County filed the biggest muni bankruptcy in U.S. history, draws on data from more than 8,500 defaults from 1920 to 2010. The ratings company determined that the economic strains facing local governments in the wake of the 18-month recession that ended in 2009 made the wave of defaults in the Great Depression a useful comparison. About 4,800 issuers defaulted on obligations between 1929 and 1939, the report said. “Our study finds that widespread municipal bond defaults have not been a feature of the most recent downturn, and we do not expect a sharp increase in defaults over the foreseeable future,” KBRA president Jim Nadler wrote in an e-mail. The $2.9 trillion muni market faces risks, including services mandated by the federal government at a time of declining federal transfers, unfunded pension liabilities, needed infrastructure upgrades and weak economic growth, the report said. “We do not foresee a material increase in municipal defaults over the medium term,” the study said. “Moreover, our findings support the view that any resulting investor losses are likely to be small.” The Chapter 9 filing by Jefferson County, which has more than $3 billion of sewer debt, followed bankruptcy filings involving Central Falls, R.I., in August and Harrisburg, Pa., last month. It came as the county, the receiver, bondholders and Alabama state lawmakers failed to implement a tentative deal struck in September that would have cut the amount owed on the sewer bonds and increased rates.