Explaining Southern California's economy

PHOTOS: Top 10 California business and economics stories of 2012

Apple Introduces iPhone 5

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Apple introduces the iPhone 5 in San Francisco. It was the first time that the technology juggernaut, the most valuable California company by far, introduced a new device since Steve Jobs' death. Will it be enough to make Apple the world's first $1 trillion company in 2013?

Rupert Murdoch

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The Tribune Co., owner of the Los Angeles Times along with dozens of other media properties, finally exited bankruptcy on New Year's Eve. Now the real fun can begin in the City of Angels: Who will buy the hometown paper? Could it be...Rupert Murdoch?

elon musk

Photo Credit: SpaceX

SpaceX CEO and Chief Designer Elon Musk watches Dragon's progress inside of SpaceX Mission Control in Hawthorne in May. The former PayPal founder whose other company in electric carmaker Tesla Motors put California's space business back on the map — and ushered in a new era of private voyages to the stars. But will he really be able to retire on Mars?

George Lucas Poses With A Group Of "Star Wars" Inspired Disney Characters At Disney's Hollywood Studios

Handout/Getty Images

Disney CEO Bob Iger completes a trip of high-profile acquisitions, beginning with Pixar, then moving on to Marvel, culminating with a purchase of Lucasfilm from George Lucas. "Star Wars" now belongs to the Mighty Mouse — and Episode 7 is on the way! But will Disney be able to inject new life into one of pop cultures iconic entertainment franchises?

Reed Saxon

California was crushed by the housing downturn. But fours years after the bottom fell out, the state's real estate market at last began to show signs of life, as the foreclosure crisis fades and a price bubble even began to form in Southern California. Will the market return to normal in 2013?

FORTUNE Most Powerful Women Dinner New York City

Jemal Countess/Getty Images for Time Inc.

Former Google superstar Marissa Mayer took the helm at troubled Yahoo, after a ugly battle between the board of directors and activist shareholder Dan Loeb. Mayer began to make immediate management changes, brought back free food, became one of the most powerful female CEOs on the U.S. — and had a baby! Can she live up to the hype in 2013?

CinemaCon 2011 - Day 2

Ethan Miller/Getty Images

The battle for the future of online content heated up. In early 2012, Silicon Valley and Hollywood dueled in Washington, D.C., over anti-piracy legislation. Hollywood had the lobbying power, embodied by former senator Chris Dodd and the MPAA. But Silicon Valley won a critical skirmish in the eleventh hour by blacking out Wikipedia for a day. Will the combatants be able to strike a truce in 2013?

Job Seekers  Meet With Recruiters At Job Fair

Justin Sullivan/Getty Images

At the tail end of 2013, California's unemployment rate dropped into single digits for the first time since 2009. And compared with the rest of the U.S., the state spent 2012 adding jobs at a brisk clip. But will the recovery be able to sustain its momentum in 2013?

 bankrupt pensions

Steven Cuevas / KPCC

San Bernardino fell off its own fiscal cliff in 2012 — and fell fast, declaring bankruptcy quicker than anyone expected. The broke Inland Empire city joined Stockton and Mammoth Lakes in a minor bankruptcy boom in California and set the stage for the municipal bond market's worst nightmare: a long-anticipated wave of defaults in the Golden State. Could that scary event come to pass in 2013?

A sign announcing Facebook IPO is flashe

EMMANUEL DUNAND/AFP/Getty Images

It was supposed to be the initial public offering of the century, enriching Facebook employees and investors and reviving a moribund IPO market for high-tech startups. But Facebook flopped in first-day trading and kept on falling in subsequent days. Facebook's lead banker, Morgan Stanley, was blamed for botching the offering. Facebook CEO Mark Zuckerberg went on the defensive. And by year end, Facebook still hadn't recovered it $100 billion valuation. But it topped 1 billion active users before the ball dropped in Times Square to ring on 2013. Will 2013 be the year it bounces back?


This is one in a series of year-end stories that look back at the most memorable pieces KPCC reporters worked on in 2012 and look ahead at a key issue that will be the focus of coverage in the coming year.

How much happened in the Golden State in 2012 when it comes to business? Lots. Lots and lots. The DeBord Report covered most of it. 

The slide show above serves up the business year in pictures for the state with the largest economy and two of America's most storied industries: Hollywood and high-tech.

And if you want to review the business year in links to the original posts...well, I've got that covered, too.

10. Apple introduces the iPhone 5 and the iPad Mini — the first all-new gadgets rolled out by Cupertino since the death of Steve Jobs

9. The long, long, LONG Tribune Co. bankruptcy comes to and end. So who will buy the Los Angeles Times?

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Standard & Poor's says that bankruptcy is no bargain for California cities

 bankrupt pensions

Steven Cuevas / KPCC

San Bernardino City Hall. Was bankruptcy really the best move for this California municipality?

Moody's, the investment rating agency, has just released some commentary on "speculative" credit in the local-government sector. This is credit that has been downgraded to non-investment-grade status. It's basically junk — or, if you prefer, "high yield." The risk of default is higher, but the interest rate is also higher, making for a beefier return.

Moody's has been focusing for a while now on the worsening fiscal situation for the cities whose debt it rates, with special concentration on California. It recently placed a number of municipalities in the state on review. The agency says that there's a new factor it's watching carefully. From the report:

Some distressed governments have confronted the plethora of economic, financial, and managerial problems by choosing to discriminate among their outstanding obligations. Lack of willingness to pay debt service is emerging as a new theme in public finance. Although it’s not expected to become a widespread practice, even among speculative-grade issuers, there are several recent examples of this development.

The City of Stockton, CA has struggled for many years to control costs efficiently amid a severely weakened local economy, ineffective negotiations with its bargaining units, and management’s decision to take on the costs of dissolving its redevelopment agency. In June 2012, Stockton filed for Chapter 9 bankruptcy protection and adopted a budget that suspends payments on some lease and pension obligation bonds. 

Another big rating agency, Standard & Poor's, is also keeping an eye on cities in California. I recently talked with Gabriel Petek, an S&P credit analyst. He indicated that S&P is also reviewing the California cities in its ratings universe and echoed Moody's concern about the "lack of willingness to pay" matter.

But he also tackled the question of whether it makes sense for financially distressed cities to enter bankruptcy, as three California cities — Stockton, San Bernardino, and Mammoth Lakes — have this year. (More may be on the horizon: Atwater, near Stockton, has declared a fiscal emergency, and things don't look too good in Compton.)

"In a case where an entity is genuinely insolvent, there may not be a lot of options," he said. This is effectively what happened in San Bernardino, where unlike Stockton, there was no pre-bankruptcy mediation process, now mandated by state law. The fiscal crisis in San Bernardino was so dire that the city proceeded directly to Chapter 9.

But as far as Petek is concerned, that was an extreme case. "Bankruptcy should be avoided at all costs," he said. "Most bankruptcies seem to exceed long-run and near-term benefits."

Case in point? Vallejo, the Northern California city that declared bankruptcy in 2008 and emerged in 2011, racking up tens of million in bankruptcy costs along the way. The Vallejo experience led to AB 506, the mediation legislation that created the process that was first tried, but that ultimately failed, in Stockton. Vallejo's dire financial straits have been much analyzed, perhaps most prominently by Michael Lewis last year in Vanity Fair.

"Other parts of Bay Area are in recovery, but Vallejo is languishing," Petek said. "They haven't had access to capital markets. Older cities need to make investment in infrastructure, and the only way to do that is via access to capital markets. So cities that may be in Vallejo [and Stockton's] position should be forewarned. It will be a costly drawn-out process."

So if bankruptcy is a bad move for California cities under financial stress, does mediation, even though it failed in Stockton, represent a vaible option?

Not really.

"We haven't seen so far that it's functioned that way some policymakers had hoped for or envisioned," Petek said. "The problem starts with initial negotiations. Multi-year contracts with labor,  securing compensation, don't enable management to deal with changing conditions."

These labor contracts have become a sticking point for numerous older, stressed-out California municipalities. Negotiated when city budgets were flush, they've become onerous since times have changed and revenue bases have collapsed due to the housing crisis and high unemployment cutting into sales taxes. Labor costs are gobbling up 80 percent of budgets, leaving city managers with extremely limited flexibility.

"Cities are service providers, but some are operating in an environment where you can't raise revenue due to Proposition 13, and some of these are cities that also locked in multi-year labor contracts," Petek said. "They removed the part of the budget they had discretion over."

Petek calls this "fiscal handcuffs." Because Proposition 13 prevents any latitude on raising property taxes and some city workers have been inflexible in renegotiating contracts, municipalities are staring down the difficult choice of declaring bankruptcy and ending up like Vallejo or muddling through and trying to slash everything but essential or non-negotiable services, degrading quality of life in their cities.

Petek doesn't let city managers off the hook, however. He said that many made decisions prior to the end of redevelopment and the loss of $6 billion painted cities into a corner. Redevelopment wasn't intended to plug budget gaps. But in San Bernardino, redevelopment money became a "lifeline," according to city officials, enabling the municipality to maintain it aging infrastructure.

The fiscal collapse of several cities in California caught the bond markets off guard. Over the past year, Moody's, S&P and others have been taking a much closer look at why cities that didn't outwardly look like major credit risks suddenly got on fast tracks to Chapter 9. For the most part, there's no reason to expect a deluge of bankruptcies. But for Petek and others, there are good reasons to drill deeper into what's really been going on with the finances of Golden State municipalities.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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Bankrupt Stockton's bond issuers and CalPERS are already bickering

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A sign stands in front of California Public Employees' Retirement System building in Sacramento. The fund has shown that it won't give an inch in bankruptcy.

One of the biggest questions to be answered by the bankruptcies of two large California cities, Stockton and San Bernardino, is "How hard will CalPERS fight?" CalPERS is the gigantic pension fund for California's public workers, managing more than $230 billion. And it's now being accused by a Bermuda-based bond issuer of getting favorable treatment in Stockton's Chapter 9 proceeding.

This is from Reuters:

A Stockton proposal to creditors in May, which was made before Chapter 9 proceedings began, showed the city on the far outskirts of the San Francisco Bay Area was ready to fully pay pension fund payments but largely abandon payments on $121 million of pension obligation bonds backed by Assured Guaranty.

Assured calculated that the loss on bond principal would be 83 percent. That amounts to $100 million, which Assured would have to cover.

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Cities in financial trouble: debt defaults are still rare

Stockton, CA Leads Nation In Rate Of Foreclosures

Justin Sullivan/Getty Images

A deserted section of downtown Stockton. The bankrupt California city has shown a willingness to default on its debt, according to Moody's.

With four California cities in the past two months either declaring bankruptcy (Stockton, Mammoth Lakes, and for all practical purposes San Bernardino) or making noises about declaring bankruptcy (Compton), it's easy to conclude that we're on the leading edge of a wave of Chapter 9s that will sweep across the state.

But the fact is that municipal bankruptcies are exceptionally rare. This is one of the attractions of the $3.7-trillion municipal bond market, which hasn't been signaling a wave of cities going bust, nor steeply discounting the debts of cities that are broke (cities in bankruptcy don't have to default on their debts — they can keep right on paying as they move through Chapter 9). 

However, Moody's, one of the big U.S. rating agencies. put out a report yesterday titled "Recent Local Government Defaults and Bankruptcies May Indicate A Shift in Willingness to Pay Debt." In it, the Moody's analysts write that they "expect the vast majority of rated municipalities" — and for Moody's that's 8,500 cities — to "muddle through and pay their debts."

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Compton is latest California charter city to face bankruptcy

Gritty Compton Works To Escape Cycle Of Violence

David McNew/Getty Images

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. 

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