Bankruptcy jitters in Stockton. Will other cities fail?
Bankruptcy of Stockton, Calif., looms large as city enters talks with creditors. But most other troubled California municipalities are taking drastic steps to avoid bankruptcy.
When the city of Stockton, California announced last month it would skip some bond payments and enter talks with its creditors, the municipal debt world shuddered.Skip to next paragraph
Subscribe Today to the Monitor
If Stockton were to go bankrupt, it would be the largest U.S. city ever to do so. Other troubled Californian municipalities might be tempted to follow suit. Predictions of mass defaults on municipal bonds might start to look a little more realistic.
But a close look at the municipal finance situation across California suggests mass bankruptcies are unlikely.
Most troubled local governments in the state have taken drastic steps to cut spending, with city managers asserting they have their arms around the problems. A new, state-mandated mediation process may also help municipalities avoid the worst - though it could force bondholders to accept losses outside the bankruptcy process.
The new law, passed after the San Francisco Bay area city of Vallejo filed for bankruptcy in 2008, requires Stockton to try to corral its major bondholders, bond insurers, city employees and retirees into mediation for up to 90 days.
"City negotiators will surely hold the bankruptcy gun to stakeholders' heads, including employees and their unions and bondholders represented by the insurers," wrote Alan Schankel, an analyst with Janney Capital Markets, in a recent note.
The city's credit ratings have been slashed. Moody's Investors Service lowered Stockton's general fund-supported debt ratings to below investment grade, a move affecting about $341 million in debt, while Standard & Poor's has taken Stockton's issuer credit rating down to one notch above 'D', the bottom speculative-grade level.
As in other troubled cities around the state, the depth of Stockton's problems is a mirror image of the heights the city of 292,000 appeared to reach during the housing boom. An inland port and agricultural hub for Central Valley farms, Stockton was abruptly - and briefly - transformed into a distant bedroom community for the Bay area in those prosperous times.
According to online foreclosure marketplace RealtyTrac Inc, Stockton last year had the second-highest foreclosure rate of all large U.S. metro areas, with 5.43 percent of its housing units receiving foreclosure filings. Las Vegas had the highest rate: 7.38 percent, compared with a nationwide 1.45 percent.
Stockton's financial problems were worsened by two decades of profligate spending on items including rich public employee contracts, a downtown sports arena and other urban revitalization projects, according to its city manager, Bob Deis.
The city faces a deficit of as much as $38 million on its general fund budget of $165 million.
In Stockton, as in Vallejo and other cities, the root of the problem is a dramatic fall in revenues. Developer fees have largely vanished with the near-halt of home building, and property taxes have followed housing values south. In Stockton, general fund revenue fell to an estimated $161.8 million for its current fiscal year, from $217.5 million in 2007-2008.
With unemployment at 10.9 percent across California - and above 16 percent in hard-hit places such as Stockton and Fresno - raising revenue with new taxes and fees is difficult. State law also puts firm limits on property tax increases and makes any type of tax rise difficult.
Still, many local officials say bankruptcy and default concerns are exaggerated.
Hercules, a town about 10 miles (16 km) south of Vallejo, recently defaulted on a debt payment amid a lawsuit with its bond insurer, prompting Standard & Poor's last month to drop its ratings on some city debt by five notches to a speculative grade 'BB'.
Since then, though, Hercules and Ambac Assurance Corp, a subsidiary of Ambac Financial Group Inc, have reached a settlement; together with union concessions, that will keep the city from having to consider pre-bankruptcy mediation.
"For the most part, the unions have been willing to come to the table," said Steve Duran, city manager of Hercules.
The only other California municipality currently seeking pre-bankruptcy talks is Mammoth Lakes. But the issue in the 7,400-person ski resort town is not the economy but rather a $42 million legal judgment against it over a property development dispute. Assistant City Manager Marianna Marysheva-Martinez said the town would not default on its roughly $2 million in debt.
A more typical case might be the town of Lincoln, a bedroom community outside Sacramento that has also suffered severely from the housing bust.
Over the course of a decade, Lincoln was transformed from a sleepy rural community of 8,000 into a bustling suburb of 42,000 and city services were expanded accordingly, including a full-time fire department put in place in 2001.