Should you be worried about recent municipal bankruptcies?
Municipal bonds have received a lot of attention recently, in part because their tax advantages could become more valuable in 2013. However, they also have come under scrutiny because of some widely publicized bankruptcy filings by local governments.
Economic problems, lower investment returns, and cuts in federal aid have led to an increase in the number of local governments filing under Chapter 9 of the U.S. bankruptcy code. They included the single largest U.S. municipal bankruptcy on record (Stockton, California, one of three municipalities in the state to file for bankruptcy in a single month).
Despite the increased pace of filings, muni bankruptcies are still extremely rare. From June 2011 to June 2012, only 17 municipalities or local government entities filed for bankruptcy in federal courts. Compare that to the 9,285 Chapter 11 filings by businesses during the same time.*
One way to check on your muni holdings is to use information available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA®) database, available at http://emma.msrb.org. You’ll need to know the bond’s CUSIP number; this nine-digit identifier can be found on a trade confirmation or brokerage statement. The information available generally includes the revenue sources pledged to repay a bond and whether any bond insurance, letter of credit, or other guarantees have been provided for its repayment.
The database doesn’t include all municipal offerings, and though it’s updated yearly, information can become outdated. The bond’s current credit rating from one of the three major ratings agencies can suggest its most recent status. However, remember that a high credit rating doesn’t reflect or guarantee a bond’s market value or liquidity.
*According to the Administrative Office of the U.S. Courts.