Bankruptcies, defaults, and other local government financial emergencies Page: 20
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General Obligation Defaults
Of the 36 government-purpose defaults, 11 were general
obligation debts-one bond and ten note defaults.
The one bond default involved a total debt of only
$110,000. This very small number of defaults on debt for
which the governments pledged their full faith and credit
evidences the financial strength of most governments
over this period. Despite this generally favorable record,
two of the general obligation note defaults-New York
and Cleveland-were so large that they created an impression
that the default problem was worse than it actually
In addition, five of the note defaults involved small
governments in Maine that failed to pay tax anticipation
notes due at the end of their fiscal year. With the exception
of Saco, ME, which will be discussed in more detail
later, these defaults all were apparently caused by notes
that were issued in anticipation of a single installment
property tax payment due late in the governments'fiscal
year. Instead of reserving money to pay off the notes as
the taxes were paid, the governments used the funds for
other purposes. As a result, they had insufficient funds
on hand at the end of the year to pay the notes.
Revenue Bond Defaults
There were 25 defaults on government-purpose bonds
for which only revenues from a project were pledged to
pay interest and principal; four of these were technical
defaults. Analysis of these defaults indicates in almost
all of the cases the bonds were issued by special districts
or statutory authorities rather than units of general-purpose
government such as cities and counties.
These defaults on government-purpose revenue obligations
were issued to fund a variety of government
* six were for water supply systems and sewers,
* five were for housing (chiefly low-income or housing
for the elderly),
* five were for hospitals, and
* three were for utilities other than water and sewers.
Geographically these default cases came from all over
the United States. Of the 21 nontechnical cases, Florida
and Tennessee each had three, and California, Mississippi
and New York each had two. Washington had the
only major default, that of the Washington Public Power
Supply System (WPPSS). (See box.)
Those cases in which causes of defaults can be identified
fall into several general categories: poorly conceived
projects which failed to produce revenues at the
projected level; cost overruns on construction or operations;
and changes in economic conditions or technological
developments which rendered projects obsolete
or unprofitable. The largest default, the well-known
case of the two defaulting projects of the Washington
Public Power Supply System, may have occurred because
of a combination of all three conditions. Hospitals
seem particularly prone to have problems in realizing
anticipated revenues, as do low-income and senior citizen
housing projects. Several utility district issues defaulted
because developers' plans proved too ambitious.
There were also a few cases of fraud.
Tax-Exempt Obligations Defaults
The ACIR list of defaults on private-purpose taxexempt
obligations was compiled as a byproduct of the
search for defaults on government-purpose obligations.
The list is incomplete and does not include information
on small locally placed issues.
The 82 cases of default found on private-purpose obligations
include those on issues by state and local governments
to finance activities which are not related to
government functions, such as bonds issued to finance
commercial and industrial facilities. In most cases, the
issuing government has little to do with the obligations
except to lend the government's immunity from federal
taxation so that interest on the obligation is tax exempt.
Most private-purpose bonds are issued by industrial development
authorities, or other special districts or authorities
created for the purpose of encouraging local
industrial development. There is usually no responsibility
of the sponsoring state or local government in the
case of a default on private-purpose bonds.
NUMBER OF LOCAL GOVERNMENT
General Obligation Defaults 11
Long-Term Bonds 1
Revenue Bond Defaults 253
1Excludes defaults when issuing government subsequently
filed Chapter 9 bankruptcy petition.
2One of these defaults was technical.
3Four of these defaults were technical.
incomplete count, see text.
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/30/: accessed November 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.