Taxable Municipal Guide - Piper Jaffray

September 2010
its finances. However, this is where the similarities end. It is much easier for a corporation to file
for bankruptcy protection than for a municipality for several reasons.
First, states cannot file Chapter 9; this provision can only be used by a municipality, defined as a
“political subdivision or public agency or instrumentality of a State.”
Second, states must approve a municipality filing for bankruptcy, and 26 states (see Exhibit 6)
prohibit their municipalities from filing for bankruptcy protection. A municipality in those states
would be required to request that specific state legislation be passed authorizing it to seek
bankruptcy protection.
Exhibit 6
States That Prohibit Municipal Bankruptcies
Alaska Maryland South Dakota
Delaware Massachusetts Tennessee
Georgia Mississippi Utah
Hawaii Nevada Vermont
Illinois New Hampshire Virginia
Indiana New Mexico West Virginia
Iowa North Dakota Wisconsin
Kansas Oregon Wyoming
Maine
Rhode Island
Finally, there is a specific set of eligibility requirements for a municipality seeking bankruptcy
protection, including specific authorization from the state or governing body, proof of insolvency,
the desire to effect a plan of reorganization, and the approval of a majority of impaired creditors
(or proof that it has negotiated in good faith and could not obtain such approval).
These restrictions make it much more difficult (and, thus, much more rare) for a municipality to
seek bankruptcy protection.
This rarity of municipal bankruptcies can be illustrated by the historical record of municipal
securities rated by Moody’s Investors Service. Only 54 municipal issuers that are rated by Moody’s
defaulted between 1970 and 2009.
To put this default history into perspective, the ten-year average cumulative default rate for all
municipal securities rated by Moody’s over the period 1970–2009 is 0.09 percent, compared to a
default rate for all corporate securities rated by Moody’s of 11.06 percent.
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Let’s take a closer look at the 54 defaults to gain additional insights into the creditworthiness of
municipal issuers. Exhibit 7 shows the sectors of the 54 defaults by count.
Piper Jaffray Taxable Municipal Guide