Bankruptcies, defaults, and other local government financial emergencies Page: 23
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not rated by bond rating agencies, so information about
issues from rating agencies is limited to large issues.
Although information on the number of new issues will
now be available from the Treasury Department lists,
there are still no central sources of information on
Classification of Defaults
In attempting to classify defaults, separating government-purpose
issues from private-purpose issues presented
some problems. Among the rules of thumb
applied was a general presumption that all hospital
bonds, except those that were clearly identified as private-for-profit
hospitals, should be classified as government-purpose.
When there was a tangled situation in
which a government service (such as port facilities or
low-income housing) was provided by a private organization
or a special authority, the government-purpose
classification was used.
Assigning defaults to a specific time period was also
difficult. Ideally, cases were dated according to the date
of the initial default. In many instances, however, the
available information did not provide the date of the
initial default. If it appeared that the initial default probably
occurred after the period covered by the 1973
study, the case was included on the current list. In those
cases in which the initial default probably occurred prior
to the 1973 study, but the issue continued to be in
default, the case was not included. However, some cases
may be omitted or counted twice because the 1973 report
contained only a count and not a listing of the
It was also impossible to get the exact amounts of debt
in default. Some reports of default contained only the
amount of missed interest or principal payment, while
others gave the original amount of the issue, or the
amount still outstanding. In some instances no dollar
amounts were mentioned. As a practical matter, there is
no uniform measure of the exact amount of a default,
although some such as New York City are obviously
large, while others are quite small.
A CLOSER LOOK AT
SOME DEFAULT CASES
Because defaults are relatively rare for government
obligations, several of the more significant defaults were
explored in more detail to determine their cause and
how the problem was resolved. Those selected include
Parlier, CA, because it was the only general obligation
bond default, and because it also defaulted on other
obligations; New York and Cleveland because of the
magnitude and significance of their defaults; Saco, ME,
because it shows the impact of a citizen-initiated tax
limitation on a city which is already having budget problems;
and the Cleveland Board of Education because of
the role of the federal courts.
Between 1973-83, there was only one default on a
general obligation bond-the City of Parlier, CA. Parlier's
default was triggered by several years of fiscal
problems, eventually leading to missed debt and interest
payments at the end of 1982. Its history is strongly
reminiscent of some of the city financial emergencies
which occurred in the 1930 era.
Parlier, a small city (population of 2,902 in 1980) in
central California near Fresno, found itself in a severe
financial emergency when an independent auditor reported
on December 15, 1982, that the city owed
$819,089 and had about $2,000 cash on hand to pay
bills. Its total revenue from all sources was only
$781,000 in fiscal 1982-less than it owed at the end of
the year. The unpaid obligations included: a delinquent
$175,000 bank loan; $12,000 in debt service past due to
the Farmers Home Administration; $6,000 in debt service
past due on general obligation bonds; $16,300 in
past due payments to its pension plans; $250,000 due to
general creditors; and various amounts due to restricted
state funds. In short, the city had defaulted on $110,000
of general obligation bonds, on a $175,000 bank loan,
and a $483,000 federal loan, failed to pay pension contributions
and was generally out of cash. The independent
auditor reported, "There is no money. There are no
The reasons for this financial emergency appear fairly
conventional. The several years prior to default had
been characterized by a series of unbalanced budgets in
which expenditures exceeded revenues by large
amounts. For example, in fiscal 1982, total spending
exceeded total revenues by $294,000 or an amount equal
to about 36% of total revenues. This imbalance in the
general fund was financed by using cash from restricted
revenues. The budgets for 1979,1980, and 1981 had also
been out of balance. A financial emergency in October
1981 was averted only because the city was able to borrow
$175,000 from a local bank, using city-owned land
On November 9,1982, the city administrator, who had
been hired the previous summer to resolve the city's
problems, declared in a letter to the mayor and city
council: "It is my conclusion that a state of financial
emergency exists, and this emergency can be remedied
only by the implementation of extraordinary measures."
He pointed out that suppliers to the city were canceling
the city's credit privileges and that the city had insufficient
cash to meet current payrolls. To resolve this problem,
the city administrator recommended that he be
authorized to file for bankruptcy under Chapter 9, an
action which would freeze past debts and give the city
time to develop an "acceptable financial strategy." He
also recommended disbanding the police department
and letting the county sheriff assume policing responsibilities
in order to produce sufficient savings to balance
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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/m1/33/: accessed January 20, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.