Nine American Cities Going Broke

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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.

This is 24/7 Wall St.’s list of Nine American Cities Going Broke.