Bankruptcies, defaults, and other local government financial emergencies Page: 21
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Because the list of private-purpose defaults is incomplete,
extensive discussion or conclusions are not appropriate.
However, a few brief generalizations and
comments can be made.
For most cases in which information is available, the
amount of money involved in the default was relatively
small; there are nine cases in which less than $1 million
is involved, and about an equal number where the issue
involved amounts of between $1 and $2 million. The
largest amounts (of those for which information was
available) were for large privately owned nursing
homes, with amounts ranging up to $50 million.
There is a higher concentration of the defaults in several
states: 14 in Oklahoma, ten in Alabama, nine in
Tennessee and five in South Carolina. The large number
discovered in Oklahoma may be attributed in part to the
sources used. A cluster of defaults in Oklahoma was
described in an analysis of a sample of defaulting issues
based on public documents in Securities and Exchange
The eagerness of the participants in an IRB-financed
project can create an atmosphere conducive
to abuse. An example of this is the Midwestern
Oklahoma Development Authority (MODA). The
Department of Defense and the Office of Economic
Adjustment recommended its formation after the
closing of the Bums Flat Air Force Base. MODA
issued seven IRBs in the early 1970s that later
defaulted. The underwriter and bond lawyer were
subsequently sued for fraud. Some of the suits are
still in court.1
Some cases of default involve companies with industrial
development bonds issued in several states. Mansfield
Tire and Rubber which went bankrupt in 1980 had
almost $10 million in tax-exempt private-purpose debt
in four different states. Permaneer Corporation's bankruptcy
involved debt issued in Michigan, Missouri,
Georgia, and Arkansas. In some of these cases, an issue
in one state did not default, despite the bankruptcy of
the parent corporation.
In 1957, 17 public utilities in the northwest formed a
municipal corporation called the Washington Public
Power Supply System (WPPSS). Projections made by
WPPSS indicated that existing power supplies would
not be adequate to meet future needs of the Pacific
northwest, and in the early 1960s, it decided to build
five nuclear power plants, financing the construction by
the sale of tax-exempt bonds.
As construction slowly progressed, it became apparent
that the five projects were encountering serious
problems for several reasons. There were major construction
cost overruns and costly rebuilding caused by
frequent failures of construction to meet standards of the
Nuclear Regulatory Commission. Financing was considerably
more costly than had been anticipated because of
soaring interest rates. In addition, instead of demand
increasing for electricity in the Northwest, demand began
to decline in response to increased energy costs and
economic slowdowns in the area. Despite these problems,
WPPSS continued its construction program, and
continued to finance its activities by selling tax-exempt
bonds, which eventually reached a total of $8.3 billion.
On January 1982, WPPSS decided to try to solve some
of its problems by abandoning work on Projects 4 and 5,
thereby foregoing any revenues from them. In January
1983, the public utilities participating in WPPSS were
required to begin paying out of their own revenues for
debt service on the bonds issued to finance the two
abandoned projects. Area consumers, faced with sharp
increases in their electricity costs, went to court. A series
of court decisions, culminating in a ruling by the
Washington State Supreme Court held that the state's
public and municipal utilities had no legal authority to
enter into a contract with WPPSS to pay their 70% share
of the debt for the abandoned Projects 4 and 5. As a
result, WPPS found itself unable to meet its obligations
and on August 18, 1983, it defaulted on $2.25 billion in
bonds for Projects 4 and 5.
The financial future is unclear for defaulting Projects
4 and 5 and even for WPPSS itself. The system has said
that it will not go into bankruptcy. At the same time,
dozens of cases of securities fraud have been filed in
federal courts against those involved in the sale of
WPPSS securities on the grounds that the sales continued
long after the serious problems of the system were
clearly apparent to Wall Street.
A securities fraud trial is scheduled to begin in September
1985. How WPPSS, its sponsoring utilities, its
contractors, investment banking firms, and investors
will share the responsibility and ultimately resolve the
largest municipal bond default in history remains
For a detailed description of the WPPSS default see the reprint
of a four-part series of Weekly Bond Buyer articles: Howard
Gleckman, WPPSS: From Dream to Default, January 1984,
Here’s what’s next.
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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/m1/31/: accessed January 23, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.