Saturday August 18, 2012

SACRAMENTO, Calif. (AP) -- One of the nation’s top credit rating agencies said Friday that it expects more municipal bankruptcies and bond defaults in California, the nation’s largest issuer of municipal bonds.

Moody’s Investors Service issued a report saying that the growing fiscal distress in many California cities was putting bondholders at risk.

The service will begin a wide-ranging review of mu nicipal finances in the nation’s most populous state because of what it sees as a growing threat of insolvency.

It noted that some municipalities were considering bankruptcy as a new strategy to address budget deficits and avoid obligations to bondholders, an emerging dynamic that could have ripple effects throughout the investment community.

Three California cities -- Stockton, San Bernardino and Mammoth Lakes -- have filed for bankruptcy so far this year. They are not likely to be the last, Moody’s said.

"To summarize, we expect ... more bankruptcy filings and bond defaults among Cal ifornia cities reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps," the report said.

The report noted that the municipal bond market has long been characterized by low default rates and relatively stable finances, an outlook that is beginning to change as bankruptcy becomes a tool for cash-strapped cities.

That requires Moody’s to reassess the financial position of all cities in California, which issues about 20 percent of the municipal bond volume nationwide, "to reflect the new fiscal realities and the governmental practices."

The agency will review other troubled states where financial difficulties may have put a strain on local governments, according to Robert Kurtter, managing director of public finance at Moody’s.

Kurtter would not say which states the agency will be examining but mentioned Michigan and Nevada as examples of states that have been struggling.

The report also noted the potential for ratings downgrades to cities, counties, school districts and special districts throughout the state.

California, officials rushed to downplay the report.

"Moody’s has an obligation to review changing circumstances, but we would just suggest that their assessment of the framework and ground activities is perhaps exaggerated," said Chris McKenzie, executive director of the League of California Cities.