Explaining Southern California's economy

Compton is latest California charter city to face bankruptcy

Gritty Compton Works To Escape Cycle Of Violence

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Compton is the latest Southland city to declare bankruptcy.

Compton could become the fourth city in California to head for bankruptcy, according to Reuters. The Los Angeles County municipality, just south of L.A., would join Stockton, Mammoth Lakes, and San Bernardino in confronting Chapter 9 protection. 

Compton's situation is extremely worrisome compared to much larger San Bernardino and Stockton, but it's not exactly surprising. Compton's current budget deficit, at $43 million, is substantially bigger than Stockton's $26 million but about the same as San Bernardino's $45 million. But Compton's population is only 93,000. San Bernardino's is over 200,000 and Stockton's is over 300,000.

And if you follow Reuters' reporting, $37 million of Compton's budget shortfall has materialized just since July 10, as financial officials and the city council have worked through severe revenue losses. 

Like Stockton and San Bernardino, Compton is a charter city, one of over 80 in California and one of 25 in Los Angeles County (Los Angeles itself is a charter city, as is San Francisco). Basically, charter cities are set up to call their own shots, through a charter that they write themselves, rather than establishing their operations based on what's known as California's "general law." The idea is that cities have a better understanding of how to run themselves than the state does. 

But some of these charters are very long in the tooth. San Bernardino's, for example, was established 105 years ago.

Southern California cities by revenue & expenditure

The County of Los Angeles Grand Jury released a report on June 30 that included what you'd have to call a red flag about L.A. County charter cities and their collective fiscal crisis. I've grabbed a chart from the report, above. As you can see, only two charter cities in the region, Burbank and Temple City, operated (barely) in the black in 2010 (Los Angeles and Long Beach were excluded from the report, due to their size). 

Compton was number three on the list, with a gap of 35 percent between expenditures and revenues. Vernon and Lancaster are a lot worse, with 82- and 51-percent gaps respectively. Pasadena and Glendale, neither of which look outwardly likes a basket case, were each running around 16 percent in the red for 2010.

Compton was number one, however, in decline for general fund balance: a whopping minus-465 percent, after starting with a balance that was already $2.5 million in arrears. (Interestingly, Vernon, with its enormous 82-percent revenue gap, added $9.5 million to its general-fund balance in 2010.)

The big picture shows that the bankruptcy train in California is running right through these charter cities, a development that's consistent with what economist John Husing told me last week, in a discussion about San Bernardino's fiscal nightmare. He explained that if a city is old, maintains its own police and fire departments, and saw substantial growth in its housing market in the past decade, it's a good candidate for fiscal problems. That's because property tax revenues tanked just as public safety costs, especially pensions, escalated.

For Compton, you could add to that substantial unemployment — 19 percent — and abundant foreclosures, with anywhere from 20 to 30 percent of homes in foreclosure across the city's various neighborhoods. 

Compton did move in the early 2000s to replace its police department and pay the L.A. County Sheriff for policing, the type of move that Husing said can lead to savings — unless, as in Compton's case, you wind up owing the Sheriff $5.7-million in 2009 and can't pay. And start talking about bringing back your old police department, as Compton began to do in 2010, according to the L.A. Times.

Every bankrupt and potentially bankrupt city in California is bankrupt in its own way. The dire finances of charter cities just provides us with an early warning system. The Grand Jury, in its report, made 22 separate recommendations for L.A. County's charter cities and required responses, but it didn't specifically address pension obligations, something that, as I reported last week, former San Bernardino city council member Tobin Brinker highlighted as one of that city's major problems. 

Nor did the Grand Jury specifically recommend that charter cities look closely at police and firefighter wages and benefits, although it did include an appendix that shows numerous high-ranking police and fire officials in L.A. Country charter cities making more than $200,000 per year in 2010. In Compton, only the City Manager made more than that in 2010 — $246,021. 

But the city manager's job in Compton hasn't been a bastion of security: there have been five different people in the city in five years, with the previous two lasting all of a year and half combined.

Compton's treasurer, Doug Sanders, says he only has $3 million on hand and $5 million in payments coming due. The city also says it can't make payroll come September 1, an echo of what's facing San Bernardino, which has only about $9 million on hand to cover its costs. This sets the table for the Compton city council declaring a "fiscal emergency" and going directly to Chapter 9, rather than submitting the the state-mandated 60-day mediation period before seeking bankruptcy protection. 

That process failed to enable Stockton and Mammoth Lakes to avoid Chapter 9.

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