Most municipal bankruptcies are from struggling small cities: Moody's

By Ashley Montgomery

Kansas City, Kan., March 7 - Moody's Investor's Service said that its latest study of defaults in the U.S. public sector found that a growing number of small municipals are entering default.

"Although we have seen large entities like Jefferson County in Alabama seek bankruptcy protection, most bankruptcy filings or defaults in 2011 came from small cities struggling to sustain general government services," said Anne Van Praagh, Moody's chief credit officer for public finance.

"They include the burdens of non-debt obligations, including pensions, entitlements and salaries that have grown out of proportion to the resources available to pay for them."

Eleven of Moody's rated municipal bonds defaulted last year and 18 have defaulted since 2008. However, the number of defaults is still low. Since 1970, only 71 municipal bonds - out of the 17,000 that Moody's rates - have defaulted.

"While we expect the vast majority of municipal issuers to continue to pay their debts, we also expect a very small but growing number of general government issuers to default on their bonded debts," said Van Praagh.

The study looked at defaults from 1970 to 2011.

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