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California: Another One Bites the Dust

Yet another California city is facing bankruptcy. The Wall Street Journal reports that San Bernardino has just authorized a bankruptcy filing as it faces the prospect of completely running out of money before the end of the year. The culprits are familiar:

San Bernardino, home to 210,000 residents, will run out of cash to pay its 800 employees within 90 days, said Jim Morris, the mayor’s chief of staff. San Bernardino expects its deficit to rise to $45 million in this fiscal year, Mr. Morris said.

[. . .] San Bernardino’s bankruptcy vote came as a surprise, setting off alarm bells throughout the state. Economists and elected officials say other California cities with similar dynamics—falling revenue and pricey police and fire departments—could seek bankruptcy protection.

Unfortunately for San Bernardinians, the story gets worse. Not only are the city’s coffers dry, but it has been lying about its finances for the better part of two decades, reporting a deficit as a surplus year after year. Reuters reports:

San Bernardino is the third California city to move toward bankruptcy in the last few weeks, but the issue of bad accounting elevates this bankruptcy to a whole new level. The California Legislature enacted a new law last fall, AB 506, that requires 90 days of mediation between the city and creditors prior to a new municipal bankruptcy filing. But it is hard to see how that will be possible in San Bernardino’s case, since there are no legitimate financial filings to negotiate from. Moreover, the city doesn’t have the ability to pay its bills for 90 days during mediation. We’ve entered the twilight zone of muni workouts here.

This certainly explains why the bankruptcy came as such a surprise. California cities are in enough trouble as it is; serial lying and dishonest accounting make an already bad situation significantly worse.

Fortunately San Bernadino may not in fact herald a huge wave of municipal bankruptcies just yet. While some of the city’s problems are similar to those facing other California cities, the city fathers of San Bernadino managed to create a uniquely toxic mess of misgovernment and denial.

But unless California’s long term slide into political incompetence and fiscal incontinence is somehow reversed, more and more California cities will be trooping into bankruptcy court. Passengers on California’s high speed train may not find a single city on their route that hasn’t had to go bankrupt, shortchange its citizens, and shaft its employees.

This, we are told, is what liberals call “compassionate government.”

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  • Jim.

    Are the poor and vulnerable really better served by collapse than by austerity?

    Also remember, when the costs of borrowing rise (and how could they not, when trust erodes and “you might be lying to me” risk premiums are imposed?) austerity will not be a matter of choice.

  • Felipe Pait

    Why the big fuss about local governments facing bankruptcy? Companies default on their debt all the time. That is why debt pays interest. In fact, a company with a top credit rating is much more likely to default than a city with a mediocre one – why the credit ratings are as they are is a mystery.

    Except for highlighting that the federal government, which is able to borrow at near zero rates, should be doing a lot more to help local governments, there is nothing very interesting about one county or city defaulting on debt.

  • Alex Scipio

    It seems clear that we need to incorporate a new lexicon in dealing with many issues of the Blue social model.

    “Misgovernment” implies, using the same prefix as “mistake,” an error, a goof, a lack of intent. “Malgovernment” seems the more correct word.

    Similarly in discussions of K-12, “maleducation” is more descriptive of recent history, particularly once you view the recent retirement speech by the Genl Counsel of the NEA. All major metro school districts have been run by Democrats and Blue policies since WW2; if Democrats WANTED better schools, we’d HAVE better schools. Ergo: maleducation.

    With San Berdoo legs-up on the floor through malicious intent of govt sector employees, and with the disasters of CA, IL, etc., I expect to see a significant rise in the use of the “mal” prefix. Anything less is fantasy irreconcilable with the facts.

  • Nick

    Incredible. They falsified their accounts?!?!?! This is Greece on a whole different scale. Much larger and hugely dangerous. And yet Californians think they need a high speed train because if they don’t go ahead with the project they lose out on federal money. California needs to start some German austerity measures now.

  • Alex Scipio

    @Felipe. Yes, there is. The economic catastrophes driven by govt-sector unions are at the root of these messes. Bankruptcy allows the termination on union contracts. This is why it is critical to declare bankruptcy, and also why, even if Congress were intelligent enough to add a chapter allowing State bankruptcy, gov Brown and his ilk would not use it. Today’s Democrat party would cease to exist without govt sector unions and forcible membership. That was what WI really was all about.

  • It’s the illegal immigration, stupid

    The elephant in the room is California’s demographic changes, especially those driven by illegal immigration.

    The fact is that it’s hard to be solvent or not expect a huge surge in government spending when a large percentage of the population (illegal immigrants) has less than an 8th-grade education (according to Pew Hispanic Center, over 40% of illegal immigrants have less than an 8th-grade education in their home countries).

  • Jordan

    @Felipe: “Companies default on their debt all the time. That is why debt pays interest”

    No they don’t and no it’s not.

  • Felipe Pait

    Alex Scipio #5, you are stating some fuzzy political opinion about the governor of California unrelated to the discussion at hand.

    Jordan #7, if in the world you live companies never go bankrupt then I’d love to only read your newspapers for a summer. And if you own a bank that doesn’t need to be rewarded for taking risks, please let me know where I can borrow money without interest.

  • Jim.


    Actually “Muni” (municipal) bonds tend to pay lower interest because they are seen as a safer investment than bankruptcy-prone private companies.

    That reputation is in the process of collapse. That is a big deal.

    Blue just got that much harder to maintain.

    Not just Blue, but one of the basic strengths of what Mead has called the “maritime system” has just been shaken to its foundations. Even if you’re not impressed by the argument that this is how successful wars get the funding to be successful, this sort of borrowing is also how major public works are funded.

    And Blue promises are destroying it.

  • Felipe Pait

    Jim #9, local authorities employ mostly teachers, police, and fire personnel. If those public employees fight wars, as you seem to imply, we live in different planets.

  • Jordan

    #8 Felipe: “Companies default on their debt all the time.”

    I was countering your unsubstantiated hyperbole. Yes, companies go bankrupt and default on debt. I wouldn’t say “all the time”. As #9 Jim says, using it as a justification to minimize the importance of municipal bankruptcy is a weak argument in my opinion.

    “That is why debt pays interest”. Risk isn’t the only reason why debt pays interest. Even if the risk of default was essentially zero, interest rates would still be non-zero (i.e. the risk-free rate of return). For example, US Treasuries.

    Hope I clarified.

  • Jim.


    San Bernadino isn’t exactly “maritime” either, Felipe, I was generalizing the sense of trust in SB’s debt to government of any scale.

    If government debt (of any scale) is seen as a comparable default risk to private company debt, that IS a big deal.

    Blue is dying of its own unsustainable promises. The poor and vulnerable, but above all those who have learned to be dependent on government, are not going to be as badly off facing austerity in the short term, as they would be facing collapse in the medium term.

  • Felipe Pait

    Jordan #11, your clarifications were unnecessary. In an academic paper or legal document I might have been painstakingly precise, but my point was clear enough for a blog dialog, such as this can be called a dialog.

    You are pretending you did not understand the point: bankruptcies of private companies happen every month, in any given year, even more so during a recession. The occasional default of a government entity is not out of line with the risks assumed by investors.

    Moreover, the fact that municipal debt default is so exceedingly rare calls into question why the rating agencies don’t give towns a rating comparable to the most dependable private corporations.

    And incidentally, right now the interest on US Treasuries is pretty much zero, because they are risk free and because there are no better investment opportunities in the private sector.

    I suppose ideology plays a role in making mere facts difficult to accept.

  • Kris

    Felipe@2: “Why the big fuss about local governments facing bankruptcy? Companies default on their debt all the time.”

    You are absolutely, 100% correct. Local governments should be permitted to declare bankruptcy and discharge their debts exactly the same way companies do, without any big fuss or whining.

  • thibaud

    According to US bankruptcy court documents, here are the totals for corporate (Chapter 11) and municipal (Chapter 9) bankruptcies in 2009-2010:

    Chapter 9 (municipal) bankruptcies: 16

    Chapter 11 (corporate) bankruptcies: 28,936

    Source: Report F-5A, US Bankruptcy Courts, Business and Nonbusiness Bankruptcy County Cases commenced by Chapter of the Bankruptcy Code during the 12-month periods ending 9/30/09 and 9/30/10.

    Once again, Mead’s flapdoodle analysis is mangling the reality. There are more than 1,000 times as many Chapter 11 as Chapter 9 bankruptcies each year.

    The default rate on muni bonds remains at about 0.1% – for example, in 2010, there was about $2.5 billion worth of defaulted bonds in a $2.9 TRILLION muni bond market.

    Can Mead do the math? Does he realize that one of the smartest investments a beleaguered fund manager could have made over the last year and a half was to buy munis, especially grade A California munis?

    Moving beyond the numbers, let’s have a look at the reasons for this tiny trickle of muni bankruptcies over the years and see whether we can recognize the pattern perceived by a man who, unable to gather and analyze data dispassionately, shoots from the hip based on whatever screaming headline Matt Drudge sends his way.

    Here are notable bankruptcies since 1990, with major causes of each:

    – Orange County, California, 1994, $1.7 billion (largest municipal bankruptcy until November 2011, and $3 billion in 2012 dollars), on interest rate-related losses. These losses resulted from derivatives contracts that Merrill Lynch stuffed down the throats of some gullible, less-than-professional, poorly-educated OC fund managers.

    In other words, chalk one up for bankster hijinks. Next:

    – Prichard, Alabama, 1999, due to inability to pay pensions.

    – Desert Hot Springs, California, 2001, due to losing a housing discrimination lawsuit.

    – Millport, Alabama, 2005, due to loss of sales tax revenues after factory closing.

    – Los Osos, California, 2006, debt related to a wastewater facility.

    – Moffett, Oklahoma, 2007, due to loss of ability to issue traffic tickets.

    – Gould, Arkansas, 2008 due to spending money withheld to pay employee income taxes.

    – Vallejo, California, 2008, due to inability to pay pension obligations.

    – Westfall Township, Pike County, Pennsylvania, 2009, due to losing a lawsuit

    – Washington Park, Illinois, 2009, due to high license fees for topless bars being ruled unconstitutional.

    Score one for “it wasn’t the teat, it was the tumidity.”

    – Prichard, Alabama, 2009, due to inability to pay pensions and especially state mandated pension increases.

    – Central Falls, Rhode Island, August 2011, due to inability to pay obligations, especially pensions.

    – Jefferson County, Alabama, November 2011, over $4 billion in debt (largest Chapter 9 bankruptcy to date), from sewer revenue bonds tainted by a interest rate swap bribery scandal with JPMorgan and county commissioner Larry Langford, and bond insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed by the occupation tax being declared unlawful in Alabama.

    – Stockton, California, June 28, 2012, Stockton filed for Chapter 9 bankruptcy. Stockton is the largest city to file for bankruptcy in U.S. history.

    So we see that not only are there many other reasons for Chapter 9 bankruptcies than Mead’s shallow key to all methodologies would have it.

    We also see that, in terms of dollar volume, the two Chapter 9 bankruptcies caused by sharp Wall Street practices dwarfed all the pension fund-caused bankruptcies combined.

    Again, note the MAGNITUDE of the two bankster-induced muni bankruptcies: Orange County was $1.7 billion in 1994 ie $3 billion in today’s dollars. Jefferson County AL was $4 billion = $7 BILLION in bankruptcies for the two bankster scams.

    And our good Dr Casaubon assures us that evil greedy teachers unions are the scourge of the Republic. Merrily we roll along.

  • Jim.

    @Felipe (13):

    US Treasury interest rates would be much, much higher if the Fed were not buying most of them.

  • Felipe Pait

    thibaud #15, thanks for posting the data!

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