What are the options for a cash strapped muni? Unlike state borrowers, munis can go bankrupt. (More than half have laws on the books permitting a chapter filing - including key ones.) The CBO report provided an excellent set of reasons for munis to default:
Benefits of Bankruptcy
* One key advantage of bankruptcy is the “automatic stay,” which is issued by a court and prevents creditors from taking action against the municipality and its officials without approval from the court.
* Another important advantage of bankruptcy is that courts can implement a restructuring plan without the consent of every creditor.
* The bankruptcy process may also allow a municipal government to reduce its labor costs by facilitating the consent of employee unions to changes in labor contracts.
* While a stay is in place, bondholders cannot force municipal officials to raise taxes in order to make debt-service payments.
Over the past 30 years, of the 18,400 muni borrowers only 54 have defaulted on their debt. An admirable track record - one that is unlikely to be continued over the next few years. Not a pretty picture for a muni investor. To top it off, BABs [Build America Bonds] (the last pillar of support for munis) is gone. I wouldn’t be at all surprised if some big muni became the Greece of America in the near future