Nine American Cities That Are Going Broke

Cities going brokeCities going broke

Photo: Composite

Of the 7,800 bonds in the U.S. secured by state or local governments, only 25 are currently speculative-grade, or junk-bonds, rated by Moody’s Ba1 or lower.Only municipalities received such low ratings, and the reasons vary. Moody’s report, “A Look at Speculative-Grade Local Governments in the Wake of the Recession,” details the economic issues that have lead each into junk-bond territory.

Click here to see the cities >
24/7 Wall St. has analysed the nine worst cities, whose credit rating is Ba2 and lower.

Each of these municipalities faces a unique situation, Moody’s explains, and the list is not indicative of a greater trend. Most municipalities, Moody’s writes in the report “face deeper and longer-standing problems than investment-grade issuers.” Analysis by 24/7 Wall St., however, reveals a number of commonalities between the lowest-rated areas.

For instance, a number of the municipalities on the list are facing shrinking tax bases possibly exacerbated by the recession and high unemployment. Some cities, such as Detroit and Pontiac, have had their economies devastated by the recession. Their populations have decreased dramatically and struggling major tax-paying corporations have contributed much.

Other cities have excessive liabilities that they are unable to meet. Central Falls, RI, declared bankruptcy in August due largely to its bloated pension plan. Strafford County, NH, spends two-fifths of its budget on a single nursing home. It funds residents’ Medicaid, but is not receiving full reimbursement from the state, causing multi-million dollar deficits.

Other municipalities have simply made bad investments. Harrison, NJ, built a $200 million sports arena that has not brought in the amount of money the city was expecting. Similarly, Salem, NJ, built a large office building downtown with the intention of leasing office space. But construction delays caused lease payment delays and money has been taken from the debt fund numerous times.

24/7 Wall St. has looked at the nine municipal bodies with the worst credit ratings assigned by Moody’s, not including school systems, rated Ba2 and lower. To get a sense of how these areas are doing, we also included most recent median household income figures from the Census Bureau. This level of credit rating implies a substantial risk of default for investors who bought these bonds with the expectation of being repaid.

This post originally appeared at 24/7 Wall Street >

Camden, NJ

Strafford County, NH

Credit rating: Ba2
2009 revenues: $36,204,000
2009 debt: $23,866,000
Median household income: $58,363

Strafford County's low rating is largely due to a money-losing nursing home on which the county spends two-fifths of its budget. Just under 85% of the patients at the Riverside Rest Home are eligible for Medicaid, yet state reimbursements to the county continue to decrease, according to Moody's. Between 2004 and 2009, the nursing home lost $36 million. The county does not expect to recover much of the money it used to cover these deficits.

Source: 24/7 Wall Street.

Riverdale, IL

Salem, NJ

Detroit, MI

Harrison, NJ

Jefferson County, AL

Pontiac, MI

Credit rating: Caa1
2009 revenues: $46,183,000
2009 debt: $99,115,000
Median household income: $32,199

The source of Pontiac's troubles is similar to that of Detroit's. General Motors, which went bankrupt during the recession, is the city's largest employer and taxpayer. The city has been in receivership since 2009. Also in 2009, the city sold its Silverdome stadium, which cost over $55 million to build, for $583,000. Such concessions have not been enough to raise the city's rating.

Source: 24/7 Wall Street.

Central Falls, RI

NOW WATCH: Briefing videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.