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Cascade of California Municipal Bankruptcy Has Begun

by Bob Morris, published
San Bernardino, California Credit:

The city of San Bernardino, CA has, as expected, filed for bankruptcy following Mammoth Lakes and Stockton into municipal bankruptcy.  Victorville and Compton may well be following soon. This is just the leading edge. Many more financially imperiled cities will be doing the same. The more cities that file for bankruptcy and thus get debt relief as well as the ability to break existing contracts including public pension agreements, the more other financially imperiled cities will consider doing the same.

“Fall mountains, just don’t fall on me,” Jimi Hendrix once said. But if you live in California, municipal bankruptcy will fall on you, even if you don’t live in one of the affected cities. San Bernardino, a city of 210,000, estimates they have between 10,001 and 25,000 creditors. That means thousands of businesses of all sizes won’t be paid in a timely manner and may only receive a percentage of what is due them. This will cascade through to their creditors, and onwards.  Bankruptcies of these sizes affect many other entities.

Unfunded public pension liability is a major factor in all the bankruptcies.  And while there are probably hundreds of thousands of pensioners in California getting modest public pension, some of the pensions are unforgivably excessive.

Stockton Police Chief Tom Morris lasted eight months and left the now-bankrupt city at age 52 with an annual pension that pays more than $204,000 -- the third of four chiefs who stayed in the position for less than three years and retired with an average of 92 percent of their final salaries.

Another big factor was overspending and accumulation of debt during the real estate boom. Ah yes, those giddy times when otherwise apparently rational people were saying, "This time really is different. The boom will go on forever.”

It didn’t, and when real estate collapsed, revenues for municipalities did too.

But the real estate bubble burst about five years ago. San Bernardino’s problems have apparently been going on for much longer than that.

A recent report by the San Bernardino city attorney said officials had falsified budget reports to the mayor and council for 13 of the last 16 years, hiding the scale of the city's debt

Despite multiple protestations, Compton may declare bankruptcy next month, say city officials.

On July 17 the mayor of Compton, a city outside Los Angeles, said he had asked state auditors to look into unspecified "waste, fraud and abuse of public monies." That city could file for bankruptcy as early as September 1, its financial officials said.

Their independent auditor quit rather than sign off on the 2011 financial statement and the Compton has said they will run out of cash to make payrolls by next month.

This is all probably going to get much worse before it gets better, as more cities file bankruptcy.

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