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Moody's: More California Cities Could Declare Bankruptcy

Aug 17, 2012

More California cities may file for bankruptcy and default on bonds in the coming months, according to a report released today by a major credit rating agency.

In a report titled “Why Some California Cities Are Choosing Bankruptcy” Moody’s Investors Service warned that the risk of more municipal bankruptcies in the state has gone up.

So far this year, three California cities have filed for bankruptcy, Stockton, San Bernadino and Mammoth Lakes.

The report cites the state’s boom and bust economy, costly labor contracts and the inability to raise revenue, as chief concerns. They also said a new state law that lays out a path to bankruptcy for cities adds to the risk for investors.

Moody’s said that over the next couple of months, an across the board ratings downgrade for all California cities is a possibility, as well as additional downgrades for cities experiencing financial strain.

Moody’s is of the big three U.S. credit rating agencies for corporate and municipal bonds. As credit ratings drop, it becomes more expensive for cities to borrow money.

In July, Moody’s downgraded Fresno’s credit rating to A3, the fourth lowest investment grade, after negotiations with police and fire unions on wage and benefit concessions failed.