Moody’s anticipates more bankruptcy filings and bond defaults by California cities, but expects the total number to be relatively low. Across the-board ratings downgrades are a possibility.

Excerpts from Why Some California Cities Are Choosing Bankruptcy

We expect more bankruptcy filings and bond defaults among California cities reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps,  however, we expect the number of filings and defaults will be low relative to the 93 Moody’s rated and 389 unrated city credits in California.

Given the deepening financial stress of many California cities, the home rule, “hands off” approach of the state as it relates to the fiscal challenges of the cities, the application of state’s new laws and access to bankruptcy, we are considering the following:

• Potential across the board adjustments of debt ratings for California cities to reflect the new fiscal realities and the governmental practices in addressing them;
• Potential for downgrades for particularly economically and fiscally distressed California localities, including counties, school districts, and special districts; and,
• Potential for additional downgrades for bonds other than GOs and special tax bonds.

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