The bankruptcy of San Bernardino could set off a string of filings by municipalities in the state as more cities face similar budget strains. Costs of benefits and entitlements from pension plans that are underfunded along with increased healthcare costs and lower tax revenues is a combination that is infecting many cities throughout the state.
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In some cases, municipalities are choosing to default on bonds that are backed by insurance, realizing that bond holders have to be paid, yet having no other options unless they are able to access capital from some external source.
Reorganizing through bankruptcy filing may or may not help. In San Bernardino’s case, faulty accounting added to the problems. Over the past few years, the city had stated multiple times that it was facing fiscal emergencies, cutting salaries and laying off workers.
It seems municipalities are just now coming to grips with the realities of the recession and only now trying to address the problems instead of facing them years ago as they should have.
Despite the number of California cities that are expected to follow with bankruptcy filings, the total number of filings across the nation is down from 2011 and revenues are improving. It’s likely that pension plans are undergoing reforms and that the issues are in the process of being dealt with.
But it also alerts advisors and investors to the fact that due diligence
needs to be a priority when considering municipal bond investment. Muni bonds have become extremely attractive to investors because yields are surpassing yields on Treasuries in an environment where the Fed is targeting zero inflation and interest rates between zero and .25%.
As a result, investors need your help in knowing what to look for in a quality tax-free investment.