Municipal bankruptcy

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.

Stockton is a small city in northern California that is east of San Francisco and located on the Sacramento River. It was an industrial city but industry has shifted out of California, partly due to regulatory hostility to business in the state which is even more marked in the San Francisco Bay area where Stockton is located. San Francisco is busy trying to get voters to approve an insane plan to blow up the dam that forms the Hetch Hetchy Reservoir. That reservoir supplies most of that city’s water. One almost wishes they get their desire. San Francisco would dry up and blow away.

Some years ago, I became involved with a local group concerned about spending in Mission Viejo. The city council was formed after cityhood from local activists, many of whom had no idea of fiscal responsibility.

Two major projects led to the formation of the Mission Viejo “committee.”

First. The city decision to break the established housing cap with a zoning change to build 741 apartments after ignoring a Petition containing 7,000 signatures of residents opposed to this project. CIG webmaster Dale Tyler led this huge petition drive initiative.

Second. Oct 28, 1996. Using stealth Agenda tactics to move the Riptide, a minor league baseball team from Long Beach to Mission Viejo. Ultimately the city had plans to build a $6 million stadium at Saddleback College for this team whose new name became the Vigilantes.

The minor league baseball team was an obvious ego trip that resembles the Stockton story. It was a smaller project (about $7 million) but Mission is a much smaller city. I even went to a couple of games and the attendance was very small. The local junior college rented its baseball stadium to the city. After a couple of years, the team moved on but the spending continued.

An expensive city hall was built after a deceptive ballot measure that low balled the cost. Subsequently, the city built an expensive public library next to the city hall.

I ended up on the planning commission for several years and the good government group managed to defeat several of the city council members at subsequent elections. Unfortunately, after our electoral success, the people we supported as reformers betrayed the group’s agenda and joined the spenders. Egos are difficult to deal with. It was a microcosm of what happened to the Republican majority in Congress after 1994.

Belatedly, California is starting to see the danger. A ballot measure is scheduled for the November election.

Since voters in San Diego and San Jose overwhelmingly supported ballot measures scaling back worker retirement benefits in June, California Governor Jerry Brown has again picked up the cause of pension reform. Alas, Democrats in the legislature aren’t listening, so it looks like voters will have to use the ballot box to get the job done.

Surveys show that pension reform and funding education are among the top taxpayer priorities, but the two are not mutually exclusive. Retirement benefits, which are costing taxpayers more than $6 billion a year, have forced significant cuts to higher education and will soon wallop K-12 schools too. According to a California State Teachers’ Retirement System actuarial report, the fund’s annual pension bill could increase by up to $10 billion over the next 30 years.

Last year the Governor proposed some modest reforms such as shifting new workers to hybrid plans, which include a reduced annuity and defined-contribution component. His plan doesn’t go as far as San Diego’s ballot measure, which transfers new workers to 401(k)-style plans. Nor is it as aggressive as the initiative championed by San Jose’s Democratic mayor Chuck Reed, which modifies benefits for current workers.

The ballot measure has stimulated a furious response from public employee unions.

Proposition 32, a measure appearing on the November statewide ballot, is not what it seems. While it claims to be about “stopping special interests” the measure actually gives special exemptions to corporate special interests and Super PACs. It would do nothing to fix what’s broken in Sacramento. Instead, Prop 32 would give even more power to the wealthy and well-connected to influence elections, control government and weaken our state’s middle class.

The fact that cities are going bankrupt does not impress the opponents.

What about Mission Viejo ? I don’t live there anymore. I moved two years ago. The last time I checked, the city of 93,000 had over 100 employees with salaries over $100,000. The total city payroll was about 150 the last time I checked. The city hall and library were built with bond issues. The city funded incentives to build a poorly located commercial mall that has had high turnover and many vacancies. The city has also funded car dealerships, not the best investment these days, and even a new parking garage for the large shopping mall in the city.

How these bonds are doing I don’t know but I would not invest in California municipal bonds these days. I have heard radio ads pushing these municipal bonds. I have never heard these before this year.

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