Muni Default & Bankruptcy-Chasing Continues

Christopher Hoene

Christopher Hoene

For a moment I thought it was April Fool’s Day, not Leap Day.  Why? Former Kansas City Mayor Mark Funkhouser, now with Governing, blogged on February 29 that Stockton, California’s plan to declare default on $2 million in debt payments might be evidence that Meredith Whitney’s 2010 prediction of 50-100 sizeable muni defaults in the year to follow, could still come to pass.  Funkhouser noted Whitney’s prediction has been “roundly derided….But, I wonder if she might have just missed the timing by a little.” Later, he adds, “…Meredith Whitney might end up being right after all.” I’m starting to think that in a media market where the rule is if you say it, it must be true, that crazy is becoming contagious.  Whitney’s projections were not just “roundly derided.” They were flat out wrong.  The muni market did not see a notable uptick in muni defaults – in numbers or scale – and has actually been improving.  Cases of muni defaults and bankruptcy have continued to be the exception, rather than the rule.  Funkhouser admits in his blog that these cases are usually characterized by idiosyncratic circumstances – “stupid or illegal” acts.  He argues, however, that Stockton’s case is different, and therefore a harbinger of trouble to come.  Here’s the problem – he then goes on to explain that Stockton’s case is one of three decades of incredibly bad fiscal management, happening “in a city with the second-highest foreclosure rate in the country and crime and unemployment rates that are among the highest.”  In other words, Stockton’s another special case. Funkhouser gets it right when he notes that “the vast majority of average Americans are hurting economically. It’s not surprising that cities are hurting as well.”  Exactly.  As we’ve written previously in this space, the real story, distracted by misinformation from Whitney and others, continues to be about the services that are being cut and the implications of those service cuts for communities.  We should be worried about the implications of cuts for the quality of life in our communities and finding ways to help cities position themselves for economic recovery, rather than chasing and fueling a muni default scare.

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