Writing about U.S. municipal distress can be a slog. Not because the evolving situation lacks for complexity, drama and nuance, but because it is taking so long to play out. As a turnaround and restructuring professional I am far more accustomed to the quick (though not necessarily efficient) reactions of the market in distressed situations. Municipalities, on the other hand, are slowly but inexorably sinking into trouble.
In a recent article Michael Connor of Reuters notes the changing nature of municipal distress. We have moved beyond the “flaming wrecks” stage (marketed by Jefferson County, Harrisburg, Vallejo, etc), and we are now seeing communities facing distress as a result of a combination of factors. While there is certainly a case to be made that bad decisions have been made, these communities are facing stress as a result of the cumulative impact of stresses beyond their control (such as reductions in state and federal support, declining property tax revenue, etc).
As Robert Slavin laid out in an article in The Bond Buyer recently, the past few years have undercut a number of assumptions about chapter 9, the section of the bankruptcy code dealing with municipal bankruptcies. We have entered a troubling period for all stakeholders: local government officials, bondholders, government employees (past and present) and the broader advisory community. It is becoming increasingly clear that a broad swath of municipalities in the U.S. face serious challenges, but with prior assumptions crumbling, we find ourselves at an inflection point, with no one entirely clear on how this emerging crisis will be resolved.
At ACM Partners our contention is simply the application of Stein’s Law: “If something cannot go on forever, it will stop.”
- Bondholders are not as secure as they may think.
- Current and former municipal employees face substantial changes to their pension and healthcare benefits.
- Loss of control is a very real possibility for troubled municipalities.
These things will happen for no other reason than that the present state is unsustainable. Change is coming.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].