Dan Walters: Bankruptcy filings by California cities may spread

dwalters@sacbee.comOctober 22, 2012 

So far this year, three California cities have filed for bankruptcy protection, and it's likely they will be joined by at least a few others in the not-too-distant future.

That's not merely journalistic speculation. Moody's Investment Service, which closely monitors state and local governments for the huge municipal bond industry, issued an unusual public warning the other day that other California cities may be headed down the same path.

"To summarize," Moody's said, "we expect … more bankruptcy filings and bond defaults among California cities, reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps."

Moody's named a number of cities whose fiscal health it will review and implied that some sort of blanket downgrading of local municipal bond issues may result – a step that could slam the brakes on governmental borrowing.

Moreover, the distress is not confined to cities, since dozens of school districts are already on state fiscal watch lists and one, Inglewood Unified, was just placed under direct state supervision as a condition of an emergency loan to stave off insolvency.

Each city or school district in bankruptcy or flirting with insolvency is a different case, of course. The city of Mammoth Lakes, for instance, filed for bankruptcy after losing a huge lawsuit over a development project.

But Mammoth Lakes aside, there are also common factors, including a sluggish economy, the state's seizure of redevelopment funds on which many cities had become – irresponsibly – dependent, overly ambitious spending (and borrowing) for civic improvements, and unsustainable pay and benefit packages for employees.

Underlying those errors of judgment was a tendency of elected city councils and school boards to make expedient decisions without fully weighing the long-term consequences, while either paying too much attention to what hired administrators were telling them, or too little.

A case in point is Atwater, a small San Joaquin Valley city near Merced that has taken the first step toward bankruptcy by declaring a fiscal emergency. A detailed history of Atwater's problems in the Merced Sun-Star reveals that City Council members ignored warnings that the city's water and sanitation systems were deeply in the red, refused to make necessary rate adjustments and constantly shuffled city managers.

Sadly, a refusal to weigh long-term consequences and act responsibly when those consequences surface is not confined to California's cities and school districts. It infects the state Capitol as well, which is why state budgets have run up multibillion-dollar deficits and political leaders are now desperately seeking voter approval of new taxes and threatening fiscal Armageddon if they are rejected.

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