Of the 7,800 bonds in the U.S. secured by state or local governments, only 25 are currently speculative-grade, or junk-bonds, rated by Moody’s Ba1 or lower. Only municipalities received such low ratings, and the reasons vary. Moody’s report, “A Look at Speculative-Grade Local Governments in the Wake of the Recession,” details the economic issues that have lead each into junk-bond territory. 24/7 Wall St. has analyzed the nine worst cities, whose credit rating is Ba2 and lower.
Each of these municipalities faces a unique situation, Moody’s explains, and the list is not indicative of a greater trend. Most municipalities, Moody’s writes in the report “face deeper and longer-standing problems than investment-grade issuers.” Analysis by 24/7 Wall St., however, reveals a number of commonalities between the lowest-rated areas.
For instance, a number of the municipalities on the list are facing shrinking tax bases possibly exacerbated by the recession and high unemployment. Some cities, such as Detroit and Pontiac, have had their economies devastated by the recession. Their populations have decreased dramatically and struggling major tax-paying corporations have contributed much.
Other cities have excessive liabilities that they are unable to meet. Central Falls, RI, declared bankruptcy in August due largely to its bloated pension plan. Strafford County, NH, spends two-fifths of its budget on a single nursing home. It funds residents’ Medicaid, but is not receiving full reimbursement from the state, causing multi-million dollar deficits.
Other municipalities have simply made bad investments. Harrison, NJ, built a $200 million sports arena that has not brought in the amount of money the city was expecting. Similarly, Salem, NJ, built a large office building downtown with the intention of leasing office space. But construction delays caused lease payment delays and money has been taken from the debt fund numerous times.
24/7 Wall St. has looked at the nine municipal bodies with the worst credit ratings assigned by Moody’s, not including school systems, rated Ba2 and lower. To get a sense of how these areas are doing, we also included most recent median household income figures from the Census Bureau. This level of credit rating implies a substantial risk of default for investors who bought these bonds with the expectation of being repaid.
9. Camden, NJ> Credit rating: Ba2> 2009 revenues: $181,257,000> 2009 debt: $103,284,000> Median household income: $25,418
Camden suffers from high unemployment, high poverty, and a weak tax base. The city’s median household income is less than half that of the national median income and is the lowest of all the municipalities on this list. Moody’s notes that “more than half of Camden’s real estate is tax-exempt, hampering already weak tax collections.” The city has had a speculative grade creditrating since 1998. Three out of the past five Camden mayors have been sent to prison for corruption, the most recent in 2001.
8. Strafford County, NH> Credit rating: Ba2> 2009 revenues: $36,204,000> 2009 debt: $23,866,000> Median household income: $58,363
Strafford County’s low rating is largely due to a money-losing nursing home, on which the county spends two-fifths of its budget. Just under 85% of the patients at the Riverside Rest Home are eligible for Medicaid, yet state reimbursements to the county continue to decrease, according to Moody’s. Between 2004 and 2009, the nursing home lost $36 million. The county does not expect to recover much of the money it used to cover these deficits.
7. Riverdale, IL> Credit rating: Ba2> 2009 revenues: $8,358,000> 2009 debt: $9,350,000> Median household income: $40,659
Riverdale has run operational deficits for a number of consecutive years, driven primarily by a reduction in the amount the village relies on debt financing. “The village funded itself by borrowing money from its sewer and water funds, and now carries an operating fund balance of -52.1% of revenues.” The city, like many others on this list, is extremely small, with a population of just over 14,000.
6. Salem, NJ> Credit rating: Ba3> 2009 revenues: $7,059,000> 2009 debt: $10,098,000> Median household income: $28,397
Salem guaranteed bonds issued to finance an office building downtown. The city planned to pay for the bonds with revenues earned from leasing office space in the building. However, revenue fell short of what was projected when construction delays caused lease payments delays. “The project’s debt service reserve fund has been drawn down numerous times,” Moody’s reports. “Once the reserve fund has been exhausted, the city is obligated to pay debt service for the life of the bonds.”
5. Detroit, MI> Credit rating: Ba3> 2009 revenues: $1,280,791,000> 2009 debt: $2,449,480,000> Median household income: $29,447
Detroit has suffered worse from the recession than almost any other U.S. city. The effects of the city’s economic situation are reflected in its credit rating. Many of Detroit’s biggest companies, such as General Motors and Chrysler, declared bankruptcy, placing “significant pressure” on the city, according to Moody’s. Detroit relies on the auto industry for its tax base, and the industry’s contraction has hurt the city immensely. The city became a “habitual note borrower,” relying on investors to close budget gaps.
4. Harrison, NJ> Credit rating: Ba3> 2009 revenues: $32,763,000> 2009 debt: $92,613,000> Median household income: $49,596
Harrison “issued a significant amount of debt to foster redevelopment, and continues to collect substantially less revenue from those developments than projected,” Moody’s explains. One of the largest projects is the $200 million Red Bull Arena, which was opened in March 2010 and cost the city $39 million in debt but has yet failed to have the expected returns. To help solve its debt problem, the city, which has a population of 13,620, plans to fire some police officers and firefighters.
3. Jefferson County, AL> Credit rating: Caa1> 2009 revenues: $309,440,000> 2009 debt: $1,337,233,000> Median household income: $44,718
Jefferson County’s debt, which is the second largest on this list, comes from a $3.2 billion overhaul of the county’s sewer system as well as a series of risky, controversial bond deals meant to help the county pay for the sewer work. A number of city officials have been sent to jail on corruption charges linked to the project. “The county defaulted on almost $3.5 million in 2008 — the biggest default in municipal history,” according to Moody’s. Worse still, this year, the Alabama Supreme Court invalidated the county’s occupational tax, which accounted for one quarter of the county’s total revenues.
2. Pontiac, MI> Credit rating: Caa1> 2009 revenues: $46,183,000> 2009 debt: $99,115,000> Median household income: $32,199
The source of Pontiac’s troubles is similar to that of Detroit’s. General Motors, which went bankrupt during the recession, is the city’s largest employer and taxpayer. The city has been in receivership since 2009. Also in 2009, the city sold its Silverdome stadium, which cost over $55 million to build, for $583,000. Such concessions have not been enough to raise the city’s rating.
1. Central Falls, RI> Credit rating: Caa1> 2009 revenues: $17,601,000> 2009 debt: $18,753,000> Median household income: $33,520
In August 2011, Central Falls declared bankruptcy largely because of the city’s pension plan, which promised $80 million in retirement benefits. According to the New York Times, the “pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.” This $80 million is approximately five times the city’s general fund budget.