Could Detroit's Bankruptcy Hit Belmont Taxpayers In the Wallet?

Detroit, Michigan and Belmont are exactly 700 miles apart.

Yet many national financial experts have predicted that the reverberations from last week's declaration of bankruptcy of the "Motor City" would likely be felt when the "Town of Homes" decides it's time to build one of the big ticket capital projects on its "wish" list.

Despite the town's stellar Triple-A bond rating from Moody's – one of only a handful of municipalities in Massachusetts achieving that grade – Detroit's financial collapse along with the recent rash of municipal bankruptcies including Central Falls, RI, Stockton and San Bernardino, Calif. and the recent downgrade by bond agencies of the state of Illinois' credit rating to "negative" has placed growing pressure on what was once considered a financial safe harbor, municipal bonds.

According to an article in USA Today, Bill Larkin of Cabot Money Management noted that municipal bonds – which cities and towns puts out to investors – have long carried yields that are about 85 percent of those of Treasuries bonds, offering a huge cost benefit to municipalities which issued them.

But if the bankruptcy of Detroit causes investors to demand more protection, Larkin told USA Today, "they might bid muni bond yields closer to that of Treasuries, forcing cities to pay more interest costs."

"My first comment is the Detroit bankruptcy was not a surprise," he said, referring to the reported litany of problems effecting Detroit from unsustainable pension obligations, the collapse of its important industrial base, the abandonment of the city by its residents and decades of dysfunctional government. 

And while many financial experts are taking a macro view of the muni market, Carmen appears to believe in a somewhat altered statement made by his one-time Cambridge neighbor, the former US Speaker of the House, "Tip" O'Neil: All municipal finances are local.

While a growing number of cities and states are finding themselves entering a fiscal black hole, Carman said the structure and regulation cities and towns in the Commonwealth must abide by are largely keeping them away from financial peril.

"Massachusetts municipalities must have a balanced budget each year by law which includes debt service payments," said Carman, which prevents officials from kicking the fiscal can down the road – be it with deficits or other obligations.

"That being said one could argue that Massachusetts bonds (debt) are more attractive for an investor’s portfolio because of the balanced budget requirement," said Carman, who championed and was successful in convincing Town Meeting in 2012 to support an annual payment into an Other Post Employment Benefits – better known as the "OPEB" which is paid to retirees as compensation for past services – that bond rating companies signaled as important to long-term stability.

But those good practices does not mean that Belmont bonds could be holding a higher interest rate in the coming years.

"What will create interest rate creep upward is the timing of cutting back the Federal Reserve Quantitative Easing program championed by Fed Chairman Ben Bernanke," said Carman.

But Belmont will continue to have the most attractive Aaa bonds on the market "if we continue with prudent financial policies," said Carman.

"We will be OK," he said.