News Column

California Cities Still Feel the Pinch

May 16, 2013

How bad and widespread are California cities' fiscal problems?

"Virtually ubiquitous and massive," says Rod Kiewiet, professor of political science at California Institute of Technology.

In April, Stockton became the fourth California city -- and the nation's largest -- to go into bankruptcy protection since the recession began five years ago. The move by the Central Valley city to reorganize its finances under court protection has triggered a guessing game over which hard-pressed cities might be next.

Despite signs of economic recovery, many parts of the nation's most populous state are feeling a hangover from the collapse of housing prices, prolonged high unemployment and lower revenue. They are confronting soaring demands for spending on public workers' pensions and retiree health care, while slashing services, rolling back pay and laying off cops, firefighters and other workers.

"There's a huge amount of California that's in extreme distress," says Joel Kotkin, a professor of urban development at Chapman University in Orange, Calif., a frequent critic of California fiscal policies. "You're going to have bankruptcies," he says. "It's almost inevitable."

While California cities' struggles to stay solvent are in some ways particular to the state, California represents one-tenth of the nation and is the place to which the rest of the country looks for emerging trends. If Stockton, San Bernardino or other California cities are able to alter or avoid debts or escape pension obligations through bankruptcy, cities across the country could be tempted to follow a similar route.

Short of that, the mere prospect of bankruptcies could reshape a municipal bond market that cities all over the country rely on for capital projects. "If bankruptcies lead to financial relief to those cities by reducing their obligations to debt service or pension costs, other fiscally stressed cities may consider bankruptcy filings," Moody's Investors Service said in a report this week.

After years of budget deficits, California's state government has begun to rebound with the help of lower unemployment and recovering home prices in some areas, and voter approval of tax increases sought by Democratic Gov. Jerry Brown.

But apart from Silicon Valley and wealthy coastal areas, inland California still suffers depressed housing, foreclosures and double-digit unemployment: 14.1% in Stockton, 17.2% in Merced and a staggering 23.7% in El Centro. The Los Angeles metro area has unemployment of 9.9%; statewide unemployment is 9.4%.

Stockton, the small resort city of Mammoth Lakes and San Bernardino all sought protection from their obligations during a two-week period last summer. They followed the path Vallejo, in Northern California, took in 2008. Mammoth Lakes has since withdrawn its bankruptcy petition.

The filing by Stockton, which has more than 290,000 residents, has been closely watched. Bond insurers who guaranteed the city's debt opposed it, arguing that the city had not reduced payments into the CalPERS state pension fund for participating public workers. A judge approved the filing while avoiding the legal question of whether pension obligations can continue to be paid in full, as the city intends, while other creditors, including bondholders, are not.

Few city officials want to plunge into bankruptcy, but in some cases there has been no alternative, says Chris McKenzie, executive director of the League of California Cities. Retiree health care, financed by most California cities on a pay-as-you-go basis, and pension payments based on agreements with workers, are the prime drivers in many cases, he says. "It depends on decisions they've made over the last 10, 15 years, whether to give richer benefits."

Hundreds of California cities have won concessions from public workers unions, McKenzie said, to stay solvent. No city wants to be seen as a likely candidate for bankruptcy, and state officials say they do not know which cities, if any, may be next.

State Treasurer Bill Lockyer has commissioned a study to develop ways to measure the probability any city is headed to insolvency.

"We don't see a tidal wave of municipal bankruptcies hitting California," says Tom Dresslar, spokesman for the treasurer. "But we're concerned about the San Bernardinos and Stocktons of the world and what the state can do to try and prevent bankruptcy and defaults."

Credit-rating agencies such as Moody's and S&P have taken a closer look at California cities since the spate of bankruptcies last year, resulting in downgrades for some. "Most cities are adjusting," says Eric Hoffmann, Moody's lead analyst for California cities. "We do expect that there's a good possibility other distressed cities could face severe fiscal pressure going forward."

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Copyright USA TODAY 2013

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters