Few local governments will default on their debt, despite a challenging fiscal environment and bigger payments to underfunded public pension funds looming large for many of them, according to a study from the Federal Reserve Bank of Chicago released Monday.
“Minimal growth or outright declines in property tax revenues, reduced assistance from state governments, and requirements to make larger payments to underfunded public pension funds will loom large for many local governments,” Richard H. Mattoon, Chicago Fed senior economist and economic adviser, wrote in the study, titled “Local governments on the brink.”
“However, if history is any guide, few local governments will either default on their debt or end up in bankruptcy,” Mr. Mattoon added. “The aftermaths of actual local government bankruptcies — such as that of Vallejo, Calif., in 2008 — suggest that governments are hurt badly when they emerge from bankruptcy, particularly in their ability to issue debt. And so, in all but the most dire cases, local governments under stress are likely to take alternative steps to shore up their fiscal positions.”
The study is available at www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cflmay2011_286a.pdf.