According to, Chapter 9 filings by municipalities are likely to increase. See “Mapping Municipal Bankruptcies” by Mike Maciag (July 25, 2012) for a visual of cities, towns, counties, utility authorities and other municipal organizations that have waved the distress flag. According to Moody’s Investors Services, California may lose some of its golden luster if other cities follow the lead of Stockton, San Bernardino and Mammoth Lakes. These three cities filed for bankruptcy in 2012. See “More Calif. cities at risk of bankruptcy” by Hannah Dreier and Gosia Wozniacka, Associated Press, August 17, 2012. The authors state that “some cities are [using] bankruptcy as a new strategy to take on budget deficits and avoid obligations to bondholders.” As a result, municipal bond investors face uncertainty for what is sometimes described as a stable market.

Some entities may not succeed in their quest to seek bankruptcy protection. Wall Street Journal reporter Katy Stech writes that the Northern Mariana Islands owe attorneys nearly $800,000 for helping them file for bankruptcy protection only to be rebuffed by the legal system. (See “Islands Hit With Bill for Failed Pension Fund Bankruptcy,” July 18, 2012). Following a judge’s ruling that disqualified the entity from getting a time out from creditors courtesy of the U.S. Bankruptcy Code, this Pacific Ocean trust territory has gone back to the drawing board in search of cash flow relief due to an underfunded pension plan. Also read “Judge Says Pension Fund Can’t Seek Bankruptcy Protection” by Caitlin Kenney,, June 5, 2012.

As third-year law student Ashley Oakey points out, even if a judge allows a bankruptcy filing to go forward, it may be moot if state authorities can and do withhold permission to file for Chapter 11 protection. Refer to her article entitled “A Cautionary Tale for Municipalities Considering Chapter 9,” ABI Journal, May 2012.

In its July 2012 165-page report on the municipal securities market, the U.S. Securities and Exchange Commission urges more and better disclosure for investors who allocate monies to the $3.7 trillion municipal bond market, adding that:

  • It takes a long time before audited financial statements are available;
  • There “are no uniformly applied accounting standards in the municipal securities market”;
  • Information about the true economics of pension and other post-employment benefit plan funding obligations are poorly explained; and
  • The increased use of derivatives by municipal issuers needs to be disclosed in more detail.

The topic of municipal bond issuers’ usage of derivative instruments is popping up in another way. According to “Libor Scheme May Have Cost Muni Issuers Millions” by James Ramage (Bond Buyer, July 6, 2012), some public entities such as the City of Baltimore allege that they were not paid what they should have received as swap Fixed Rate Payors because the London Interbank Offered Rates were “artificially” set too low.

In a notable twist, the way that municipal borrowing cost benchmarks have been calculated is likewise coming under scrutiny. According to “Muni Rates Examined for Signs of Rigging” by New York Times reporter Nathaniel Popper (July 30, 2012), with help from Mary Williams Walsh, questions are being asked about how the Municipal Market Data or “M.M.D. index” levels are determined. Inasmuch as numerous municipal derivative transactions like swaps are tied to this important index, it is possible that the same kind of scrutiny about LIBOR will be applied to the municipal capital markets.

As the discussions ensue, there appears to be a groundswll of regulatory enforcement and litigation initiatives underway. This is unlikely to abate anytime soon.