Explaining Southern California's economy

Cities in financial trouble: debt defaults are still rare

Stockton, CA Leads Nation In Rate Of Foreclosures

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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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San Bernardino's loss of redevelopment money: Not the state's problem

BANKRUPTCY RESOLUTIONS

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San Bernardino Councilman Rikke Van Johnson explains municipal bankruptcy process at a town hall meeting last week. What role has the loss of redevelopment money played in the city's fiscal crisis?

The San Bernardino City Council is expected to vote tonight to declare a fiscal emergency, enabling the Inland Empire municipality to proceed directly to Chapter 9 bankruptcy without passing the 90-day state-mandated "Go" of mediation with its creditors. I've been reporting on how San Bernardino wound up with a fiscal crisis — and why other California cities may be staring down the same nightmare scenario. 

But one thing that has city officials particularly enraged in San Bernardino is the loss of state redevelopment money. Last year, Gov. Jerry Brown and the state legislature took back money that had been going to redevelopment agencies to close the state's massive budget deficit. The total loss to cities? Around $6 billion. 

The move — which was fought by the redevelopment agencies and got all the way to the California Supreme Court, where the new law was upheld — hit San Bernardino hard.

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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. 

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San Bernardino's finances were already dire in 2010

Researchers Predict Major Earthquake To Hit California In Next 30 Year

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San Bernardino City Hall. In 2010, the City Council was warned that bankruptcy was on the horizon.

A former San Bernardino City Council member, Tobin Brinker, commented on my post from yesterday about the bond markets being taken by surprise by the Inland Empire municipality's vote this week to become the third California city to declare bankruptcy. The one-time representative of the city's third ward wrote about a council meeting that took place in 2010: 

[C]ity Treasurer David Kennedy spoke and explained the city had lost $40 million dollars in its investment pool in the previous three years. If major changes aren't made he will not be able to certify that the city can meet its payroll for the next six months. He was the first person to mention BANKRUPTCY. The City Finance Director Barbara Pachon spoke and shared a slide titled "Symptoms of Bankruptcy." She informed council members that we unfortunately meet all of the symptoms....

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San Bernardino bankruptcy caught the bond market by surprise

Berdoo Bankrupt

Steven Cuevas / KPCC

San Bernardino city council voted to prepare a bankruptcy late Tuesday. The bind market was completely shocked.

You'd think a $3.7-trillion municipal bond market would watch over the cities that issue debt like a hawk. But of course, that can be tough when you're talking about something that big. And although ratings agencies like Moody's and S&P monitor the finances and prospects of default for thousands of cities, they don't always have a clue what's going on inside city hall.

Shocking as it may sound, right up until it voted to move toward a Chapter 9 declaration earlier this week, San Bernardino's bonds were rated "investment grade" — meaning that institutional investors and big mutual funds could buy them. Some of the city's bonds have been downgraded to "junk" status now, reports Reuters. But from the perspective of the bond market, San Bernardino didn't look like a city facing a fiscal crisis with effectively no money in the bank, the inability to meet its payroll, and a possible scandal brewing over whether the city has accurately represented its finances to the outside world.

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