S&P Capital IQ: Ten Warning Signs of Potential Municipal Bankruptcy
PR Newswire




NEW YORK, Sept. 10, 2013 /PRNewswire/ -- In the wake of Detroit's bankruptcy, S&P Capital IQ has published a list of ten warning signs that could indicate if a city or county is at risk of defaulting on its general obligation bonds.

"Detroit experienced the vast majority of these warning signs," said Bob Durante, leader of the Americas Solutions and Services Team for S&P Capital IQ Risk Solutions.  "If a city or county experiences even half of these, we would consider them an at risk candidate, and deeper and more frequent surveillance would be conducted."

Top 10 Warning Signals To Determine Bankruptcy Candidates

Management Credit Risk Factors:
1.       Late budget adoption, or late receipt of audited financial statements
2.       High degree of senior administrative turnover
3.       Government showing lack of willingness to support the debt

Economic Credit Risk Factors:
4.       Unemployment rate over 10%
5.       Income level that is less than 75% of U.S. average
6.       Tax base market value that is less than $50,000 per capita

Debt Credit Risk Factors:
7.       Total debt service that represents more than 25% of expenditures
8.       Unaddressed exposures to large unfunded pension or OPEB obligations

Financial Credit Risk Factors:
9.     Limited capacity or willingness to cut expenditures
10.   Overall general fund balance of less than 1% of expenditures, or general fund deficit

From the management credit risk perspective, Mr. Durante said that the city government of Detroit suffered from an inability and unwillingness to pay their debt.  He added that from the economic perspective, Detroit had an average unemployment rate 24 months before filing for bankruptcy of 18.7%, which was higher than the rates for other bankrupt cities such as San Bernardino and Vallejo, CA, Harrisburg, PA, and Bridgeport, CT.

Mr. Durante said that generally speaking if the municipality or county's debt service is more than 25% of total governmental funds expenditures, the debt burden would be considered a weak credit risk factor.  He added that off-balance-sheet items such as pension funds, other post-employment benefit obligations (OPEB), and contingent liabilities should also be examined closely.  Detroit joined Prichard, AL, Vallejo, CA, Central Falls, RI and Harrisburg, PA in filing for bankruptcy due to an inability to pay either their pension fund obligations or their exposure to significant pension liabilities. 

"Detroit's economic strength has been in serious decline for the past decade," said Mr. Durante.  "The city's depleted economic base, massive debt burden, and below average financial management were the key drivers of its very weak credit profile.  These ten warning signs, which are part of our methodology, are designed to help find the next Detroit before it files for bankruptcy."

To view a video of Mr. Durante discussing these warning signs, click on the following link.  http://www.youtube.com/watch?v=4s_oNM4-r9s

An article by Mr. Durante, "How Detroit Went Bankrupt, And The 10 Key Warning Signals To Determine Who's Next," will appear in the November issue of The RMA Journal.  

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