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Expect more defaults in the $4 trillion municipal-bond market this year, Bank of America Corp. strategists said. Most of the distress will be concentrated in riskier sectors like nursing homes and hospitals, Bloomberg News reported. Muni-bond defaults are forecast to total between $1.7 billion and $2.1 billion in 2023, according to a research note the bank published Friday. First-time payment defaults in January rose 122% year-over-year to $611 million, marking the third highest month since 2019, the note said. Almost all of the defaults were unrated securities in the not-for-profit, nursing home and hospital industries. The forecast reflects a toughening financial outlook for higher yielding debt that until recently had benefited from an extended stretch of low interest rates, and in some sectors, stimulus money. Most of the credit pain will likely be concentrated among smaller issues. Despite the anticipated uptick in defaults, it’s been roughly three months since the last chapter 9 bankruptcy petition by Chester, Pennsylvania, about a month longer than the average length of 52 days between filings since 1982, BofA said. The city near Philadelphia filed in November because of a massive debt to its employee pension funds.

Citing evidence that the administration is “internally dysfunctional” and rife with “widespread nepotism,” a state judge in Chester’s rare bankruptcy case on Tuesday called for “major changes” in the way the financially distressed city is governed, the Philadelphia Inquirer reported. In a sharply worded 45-page ruling, Commonwealth Court Judge Ellen Ceisler described “a pattern of city officials’ taking care of their own and intentionally turning their backs on wrongdoing within their departments.” She stopped short of granting the request by state-appointed receiver Michael Doweary to essentially take control of the government but did agree to limiting the powers of City Council members by stripping them of their department-head duties, including oversight of the city’s finances. Chester’s situation is a rarity: Only 31 of the nation’s 36,000 municipalities have filed for bankruptcy in the 85 years that the option has been available. Ceisler said that she was “extremely troubled” by the fact that the council member who also was the chief financial officer failed to tell the receiver that the city had lost $400,000 in a phishing scam until three months after it happened. She said that Mayor Thaddeus Kirkland had appointed department heads “based on their loyalty to City Council and the mayor’s own inclination in a particular year, rather than on the person’s actual qualifications.”

The Supreme Court turned away a Missouri appeal that sought to ensure states can cut taxes even as they receive $195 billion in federal pandemic-relief money, Bloomberg News reported. The justices without comment left in place a federal appeals court decision that said Missouri lacked legal standing to press a lawsuit over the requirements imposed under the American Rescue Plan Act. Missouri is among several Republican-led states that sued after President Joe Biden signed the $1.9 trillion measure into law in March 2021. The law includes a provision that says a state can’t use the money “to either directly or indirectly offset a reduction in the net tax revenue of such state.” Missouri said that provision prohibits only the deliberate use of relief funds to pay for a tax cut. The state argued that the Treasury Department’s interpretation of the law would sweep more broadly, blocking any new state tax policy that reduces revenue without some sort of offset. The St. Louis-based 8th US Circuit Court of Appeals faulted Missouri for not pointing to any particular state policy that might run afoul of the federal rule. The state was seeking “a quintessentially advisory opinion,” something federal courts don’t issue, Judge Jane Kelly wrote for the panel.

The city of Chester, Pa., on Nov. 10 filed a chapter 9 municipal bankruptcy petition. Although it has operated under state supervision since 1995, the Philadelphia suburb has not been able to address its large employee retirement liabilities, according to a Cato.org blog post. In recent years, municipal bankruptcy filings have been rare. Only three cities invoked chapter 9 between 2014 and 2021: Hillview, Ky., in 2015; Perla, Ark., in 2019; and Fairfield, Ala., in 2020. Although the large allocations of federal funds to local governments under the American Rescue Plan Act (ARPA) may have been expected to ward off bankruptcies for a few years, Chester’s situation is especially dire. The city has received $30 million under ARPA, but this amount pales compared to the $430 million in liabilities reported on its most recent audited financial report, dated Dec. 31, 2018. Further, the city has dedicated over $1.5 million of the ARPA funds to premium pay and other forms of employee compensation. The fact that Chester has yet to publish financial statements for years beyond 2018 is also problematic because it deprives decisionmakers, creditors, analysts and other interested parties of a current snapshot of Chester’s financial condition. The city’s tardy disclosure also violates the federal Single Audit Act as interpreted by 2 CFR 200.512, which requires a local government receiving substantial federal funding to produce an audit within nine months of its fiscal year end. Of the city’s $430 million in reported liabilities as of 2018, the lion’s share is unfunded pension and retiree health benefits. The city’s three pension systems reported a total of $130 million in Net Pension Liabilities. According to the Pennsylvania Auditor General, the systems had an overall funded ratio of 47 percent in 2021. The Auditor designated Chester’s pensions as severely underfunded, the only city it placed in this category.

The city of Chester, Pa., is seeking bankruptcy protection, aiming to cut hundreds of millions of dollars that it owes in pension obligations and other debts, WSJ Pro Bankruptcy reported. The city’s bankruptcy petition was filed Thursday with the U.S. Bankruptcy Court in Philadelphia under chapter 9. Chester’s chapter 9 filing makes the city the largest U.S. municipality to go bankrupt since Puerto Rico in 2017 and echoes the earlier bankruptcies of the cities of Detroit and Stockton and San Bernardino, Calif., in the years following the 2008-09 financial crisis. Once a thriving industrial and manufacturing hub, Chester has struggled financially in recent decades, and its condition got worse after the COVID-19 pandemic, said Michael Doweary, the city’s receiver since June 2020, in a court filing. Without reorganization, the city would have to expect a deficit of $46.5 million in 2023, $3.6 million in 2024 and $12.5 million in 2025, with the shortfall increasing each subsequent year, he said. Gov. Tom Wolf placed Chester under receivership in 2020, citing its “fiscal emergency.” “The residents of Chester have borne too much burden for too long, and the city can no longer afford to mortgage its future to pay for past and present financial peril,” Mr. Doweary said. One of the biggest financial burdens for the city near Philadelphia has been its obligations to its retirees. The city of about 32,500 people failed to make payments to its three pension plans — for police, firefighters and other employees — between 2013 and 2020, and it owes at least $127.2 million in back payments, Mr. Doweary said.

Decade after decade, Chester, Pennsylvania, has fallen deeper and deeper into a downward financial spiral, Bloomberg News reported. As the city’s population dwindled to half its mid-century peak, shuttered factories near the banks of the Delaware River were replaced by a prison and one of the nation’s largest trash incinerators. A Major League Soccer stadium and casino did little to turn around the predominantly Black city just outside Philadelphia, where 30% of its 33,000 residents live below the poverty line. Debt piled up. The government struggled to balance the books. Now, with its police pension set to run out of cash in months, a state-appointed receiver is considering a last resort that cities rarely take: filing for bankruptcy. “The alarm that we’re sounding is very real,” said Vijay Kapoor, who does economic analysis for cities and is serving as the chief of staff for Chester’s receiver. “Chester is by far — and I mean by far — in the worst condition that any of us have ever seen and ever had to deal with.” Few U.S. cities are contending with financial strain as dire as Chester, which has been overseen by Pennsylvania’s program for distressed local governments for nearly three decades. But in another sense it’s far from alone: Like Chester, governments nationwide have failed to save enough to cover all the benefits promised to retirees, turning it into the latest cautionary tale about the reckoning when the bills finally come due. In the years after the housing-market crash, three California cities, Detroit and Puerto Rico all went bankrupt, in large part because of retirement-fund debts. Such pensions are now being tested again, with the S&P 500 Index tumbling over 20% this year and bonds pummeled by the worst losses in decades.

States once flushed with revenue from surging sales tax collections are starting to see inflation-related declines, signaling state revenues may continue to drop, Bloomberg News reported. The number of states that saw year-over-year declines increased to 25 in June from 16 in May, according to the Urban Institute. That declining performance, which is analyzed over a three month rolling average, follows a strong first quarter for sales tax receipts in which nearly every state saw growth in real terms. While state coffers remain buoyed by high sales tax collections this year and record income tax receipts in 2021, changing consumer spending patterns and high prices have triggered a decline in revenues for one of states’ key funding sources at the same time as stock market volatility threatens income tax collections.