The recent bankruptcy filings of three California cities have U.S. investors worried that Fresno could be next to go down this road, according to a major Wall Street financial house.
Vikram Rai, strategist with Citigroup Inc., said bond investors are increasingly asking about the financial health of Fresno out of concern that the city will seek court protection from its debt obligations and that millions of investment dollars will be lost.
Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy protection this summer.
“Investors worry about contagion,” Rai told the Bee. “Many California cities are in a tough situation.”
Fears about Fresno in the trading world were reported in Citigroup’s investment strategy report, which this month said that “the harsh spotlight (of potential bankruptcy) has shifted to Fresno.”
“One California city after another becomes insolvent as the state’s economic crisis worsens,” Steven Greenhut wrote earlier this month at Reason. “First Vallejo, then Stockton, then Mammoth Lakes, and now San Bernardino and soon possibly Compton. As Orange County Supervisor John Moorlach told Bloomberg News, the bankruptcy dominoes are starting to fall. One California city after another—following a decade-long spree of ramping up public-employee pay and pension benefits, as well as redevelopment debt—are becoming insolvent:”
The latest city to declare bankruptcy is San Bernardino, which has declared an emergency situation that will allow it to evade the negotiation period mandated by state law. The city simply doesn’t have the cash to keep operating. As Bloomberg reported, “San Bernardino and its agencies have more than $220 million of debt, including $48.6 million of taxable pension-obligation bonds, according to financial statements.” Pension-obligation bonds are used by cities to pay ongoing pension expenses, yet San Bernardino’s problems show that a city cannot borrow its way out of debt.
Other big cities, including Los Angeles, are talking more openly about the bankruptcy option. Not long ago critics who mentioned the B-word were considered Chicken Littles.
The latest talking point is that these cities couldn’t control what happened to them. The Riverside Press-Enterprise reported: “The city of San Bernardino’s financial woes are a directly correlation to a torrent of foreclosures in the Inland area of Southern California, the national foreclosure tracking firm RealtyTrac said Thursday. ‘Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,’ said RealtyTrac vice president Daren Blomquist.”
There’s no doubt San Bernardino and Stockton—Ground Zero for the housing crisis—suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know—they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals. They squandered the money when it came flowing in, now depict themselves as victims of circumstance when the funds dried up.
The real culprit is foolish decision making. Stockton, for instance, refused to take advantage of an exemption in prevailing wage laws—something that could have saved it money but would have angered the powerful unions.
Which brings us to Walter Russell Mead, who adds that unions are flailing in the private sector, but continue to have a comparative stranglehold on government:
“Organized labor is in free fall,” writes Eduardo Porter in the New York Times. He’s right. As Porter puts it,
The number of workers who belong to a union has plummeted about 20 percent over the last decade. Only 8 percent of all workers are unionized. And leading labor activists are wringing their hands over the seemingly inevitable death of a movement unable to cope with technological change.
The one bright spot in this gloomy picture is the public sector, where organized labor still claims a healthy 37 percent of all workers, but even there things are looking worse. Scott Walker’s wins in Wisconsin threaten to set off a national fight to rollback public sector unionization, and many cash strapped states and cities are cutting wages and benefits and laying off workers over the objections of union leaders. And union promises of safe pensions are looking shaky; even NPR is running sobering stories about just how weak and poorly secured these vaunted programs really are.
If unions can’t protect you from layoffs and cutbacks, and if they don’t know how to negotiate pension agreements that actually, um, work, public sector workers are going to lose faith.
Mead has a successor notion to unions, but don’t look for the public sector to go that route until the bottom has been hit. And sadly, with plenty of zip codes left in California waiting to collapse next, this Red Queen’s Race has much further to go to auger the plane — or the high-speed train — even deeper into the ground.
Speaking of California’s unions, another article by Mead suggests “California’s Bankrupt Cities: Look East to Wisconsin.” If so, as Peter Robinson posits on this week’s Ricochet Podcast in an interview with Josh Trevino of Red State and PJM’s own Victor Davis Hanson, dinosaur leftist Jerry Brown will have to do a reverse Nixon Goes to China maneuver, as this recent headline at the Washington Examiner reminds us: “Welcome to California: America without Republicans.”
(What could go wrong, Thomas Friedman just asked, speaking of China.)