In just over two months, investors pulled $25 billion out of municipal bonds because of fears of defaults. Concerns intensified after Meredith Whitney, an influential financial analyst who heads her own firm, recently forecast the possibility of 50 to 100 municipal bond defaults worth hundreds of billions of dollars this year.
Other analysts believe such a scenario is unlikely, but they acknowledge there could be an increase in government defaults and bankruptcies.
From 1970 to 2009, there were just 54 defaults out of 18,000 municipal entities tracked by ratings agency Moody's. The agency has estimated 10 to 15 municipal defaults are possible this year, although they are more likely to occur in small towns than larger cities.
"Most cities are not talking about insolvency," said Richard Ciccarone, chief research officer for McDonnell Investment Management in Oak Brook, Ill., which monitors a database of government finances.
Yet some are.
The day after the Martin Luther King Jr. holiday, officials from Hamtramck, Mich., drove to the state Capitol with a plea to be allowed to file for bankruptcy protection. The city, whose revenue problems are worsened because of a tax dispute with neighboring Detroit, figures it has enough money to make it through the end of March. Other cities aren't much better.
"We're really a bellwether for so many cities in Michigan," said Hamtramck Mayor Karen Majewski. "Everyone's watching to see what their options might be, and how the new governor and Legislature is going to deal with the situation that's really shared across the state."
Hamtramck officials want to declare bankruptcy because it would invalidate contracts with police and firefighter unions, allowing the city to renegotiate pensions and retiree health benefits.
Since the San Francisco Bay area city of Vallejo declared bankruptcy in 2008, it has shaved costs by closing fire stations and reducing funding for senior centers, libraries and public works.