Credit Cluster and Contagion Risk Related to Distressed Municipalities

Source: Richard A. Ciccarone, President & Chief Executive Officer of Merritt Research Services LLC, paper presented at the presented at the 5th Annual Municipal Finance Conference, 2016

When cities and counties encounter financial distress, nearby governments face an increased risk of suffering the spillover effects of the crisis. This “contagion risk” is often caused by municipalities’ common vulnerabilities or interdependencies, but analysts often disagree about what specific characteristics put nearby municipalities at the greatest risk. A new analysis from Richard A. Ciccarone of Merritt Research Services, LLC determines that the main drivers of contagion risk are negative population trends, high overlapping debt loads combined with high, unfunded pension, a limited capacity to raise taxes, and deferred infrastructure improvements that lead to more expensive financial obligations down the road. Using a model based on these factors to study cluster risk in almost 2,000 US cities, Ciccarone’s analysis determines that the most vulnerable cities are New Orleans, Detroit, Philadelphia, Pittsburgh, Chicago, Syracuse, Cincinnati, St. Louis, and Birmingham.