UPDATE: That didn’t take long.
Moody’s credit rating service issued a report stating that the plummeting financial condition of many California counties, cities, school districts and other government agencies will soon result in large numbers of municipal bankruptcy filings. Concerned about their own potential liability for providing high ratings that encouraged conservative elderly Americans to invest in risky bonds; Moody’s announced they will undertake a wide-ranging review of municipal finances because of the growing insolvencies.
The Moody’s report comes just two days after we reported that “CALIFORNIA SALES TAX REVENUE NOSE-DIVES BY 33.5%.” Stock brokers have often recommended California municipal bonds as very safe investments, due to historically low default rates and relatively stable finances. But Moody’s said that outlook is changing after the Chapter 9 Bankruptcy filings of Stockton, San Bernardino and Mammoth Lakes.
I’m watching a Fox News program on municipal bankruptcy. The obvious examples are in California but Jefferson County, Alabama is the largest example in the country. An earlier example was Harrisburg, PA. Both cases involved insurance companies which had guaranteed the municipal bonds.
San Bernardino, CA is the latest California example and public employee unions are a big part. The real estate collapse was the other big factor but the San Bernardino area was always very susceptible to these problems because that area had become a commuter bed room community for Orange and Los Angeles Counties. People who could not afford homes in the communities where their jobs were located are a recent phenomenon in California. Nobody wanted to live near a steel mill or an old fashioned industrial plant. If they could afford it, they commuted.
I moved to Mission Viejo, CA in 1972. At the time, this was a small bed room community for Los Angeles. The commuter traffic was northbound in the morning and southbound in the afternoon. About 1980, this began to change as Irvine, CA was developed after Mission Viejo and wisely included industrial parks for light industry. The city of Irvine is located in an old land grant from the days when California was part of Mexico. The Irvine family, who owned the land (two of whom attended USC with me in the 50s), got Donald Bren, the son of actress Claire Trevor, to run the company that developed the land and somebody wisely donated land to the University of California for a new campus.
Donal Bren has become a billionaire and the city of Irvine became a center for high tech industry, partly based near the new university. The commuter patterns changed and, now, southbound traffic from Los Angeles is in the morning. Home prices in Irvine went way up and those whose incomes did not allow them to buy a home in Irvine or Mission Viejo, bought homes in San Bernardino and other “eastern empire” communities. That meant they were less able to weather a real estate collapse with the loss of value in those homes. The problems are not limited to California but they have been severe here.