Detroit Fallout May Stifle Bonds

Article excerpt

Pittsburgh and other cities likely will pay more to borrow money as a result of Detroit's bankruptcy because anxious investors might shy from investing in municipal bonds, financial experts said on Friday.

The impact on Pittsburgh, which avoided bankruptcy by seeking state oversight of city finances, should be minimal, officials said.

"People who invest in municipal debt kind of know what's going on. They know that some cities are better off than others," said City Controller Michael Lamb.

Cities depend on the nearly $4 trillion municipal bond market to fund critical projects. Detroit, which owes creditors about $19 billion, filed bankruptcy on Thursday -- a move likely to trigger investor anxiety and rising interest rates on municipal bonds, experts said.

"It's one of the things that scares investors, and so we could see a little bit more selling going forward and a little more reluctance to buy general obligation bonds," said Tim Davis, vice president and director of the fixed income and municipal bond department for Downtown-headquartered Hefren-Tillotson Inc.

Municipal bonds long have had a reputation as a safe investment. What investors decide about the fallout from Detroit stands to have a huge effect on the municipal bond market, said Bill Larkin of Cabot Money Management.

Municipal bonds have carried yields that are about 85 percent of those of Treasurys, offering a huge cost benefit to cities, he said. If the Motor City's bankruptcy causes investors to demand more protection, they might bid muni bond yields closer to that of Treasurys, forcing cities to pay more interest costs.

Still, other cities have debts nothing like that of Detroit, whose bankruptcy is the largest municipal bankruptcy in U.S. history.

"It seems to me the effect on cities like Pittsburgh would be minimal, if at all," Lamb said.

Pittsburgh sought state fiscal oversight in 2004, avoiding the bankruptcy proceedings that Stockton, Calif., and Jefferson County, Ala., also have filed.

Harrisburg, under a state-appointed receiver, is working to resolve a debt problem caused by the sale of the city's incinerator and lease of its parking assets. …