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Californian city close to filing bankruptcy

Old 02-28-08, 02:35 PM
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the local government bankruptcy thread

this is going to be interesting if it happens

for anyone who hasn't read it in the papers, the Auction Rate Securities market has collapsed in the last few months. apparently since the 1980's governments have sold long term bonds where the rate is set weekly or monthly in auctions. lately no one wanted to buy the bonds so the rates automatically reset as high as 20%. and wall street has sold local governments some weird investments in the last few years that are now costing them a lot of money

this union thing is just the icing on the cake


http://calculatedrisk.blogspot.com/2...cy-filing.html

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

The city council is scheduled to consider a resolution tomorrow to file for Chapter 9 bankruptcy protection, after negotiations with labor unions to win salary concessions broke down Monday.
and the original Bloomberg story

http://www.bloomberg.com/apps/news?p...=ajxCNoS2DEzE#



Feb. 27 (Bloomberg) -- Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

The city council is scheduled to consider a resolution tomorrow to file for Chapter 9 bankruptcy protection, after negotiations with labor unions to win salary concessions broke down Monday. If approved, Vallejo would become the biggest city and second-largest local government in the state after Orange County to file for bankruptcy.

Municipalities throughout California are grappling with billions of dollars in labor and pension cost increases incurred during the late 1990s. The crisis comes as the worst housing slump in the U.S. in 26 years saps tax revenue. The state's own $16 billion deficit led Governor Arnold Schwarzenegger last month to declare a fiscal emergency.

Bondholders are ``creditors who would have to come to the table and it may be possible to adjust how much you are paying them and on what time period, which would, in effect, free up money that could be used as part of the plan to resolve the city's problems on a longer-term basis.'' John Knox, a public finance attorney with the law firm Orrick, Herrington & Sutcliffe, told the city council last night.

`Last Resort'

Vallejo faces a $6 million shortfall and won't have money left to pay salaries as of March 31, according to the city manager's office. The deficit is expected to grow to $13 million during the coming fiscal year, beginning July 1, according to budget documents.

Police and firefighting salaries, pension and overtime consumes $63.1 million, or about 74 percent of the city's $85 million general fund budget. The city has slashed $13 million in spending since December 2006, firing 47 workers.

``Bankruptcy is a last resort,'' said councilwoman Joanne Schivley. ``But guess what folks, that's where we are now at.''

Standard & Poor's on Feb. 21 changed its outlook to negative from stable on $59 million of city bonds. That debt, backed by water-system revenue, motor vehicle license fees and special district property assessments, is rated A and A-, the sixth- and seventh-highest investment grades.

Big Impact

Clark Stamper, who oversees $600 million of municipal bonds at Stamper Capital & Investments, including Vallejo debt, said a bankruptcy filing could encourage other California communities to consider the step should the city persuade a judge to reopen labor agreements.

``What happens in Vallejo is going to be the model for what happens across the state,'' Stamper said yesterday. ``It will have a big impact.''

Chapter 9 of the federal bankruptcy code deals specifically with municipal governments such as cities, counties and school districts, allowing them to reorganize their debts and come up with a way to pay them off.

If the city seeks bankruptcy protection, basic government services such as police and firefighting, would continue. The filing would freeze all creditor claims while city officials devise a plan to solve the financial troubles. That plan would need approval by the court, which could dissolve the labor contracts that aren't set to expire until 2010.

Compounded Woes

Vallejo was home to the West Coast's first naval shipyard, which was shuttered in 1996. The area has been one of the hardest hit in Northern California by the housing market slump.

Home prices in Solano County dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm that tracks real-estate in the state.

Compounding the city's woes is lost tax revenue when above- normal rains damped attendance at a local Six Flags Inc. marine world amusement park, one of the 10 largest employers in the county.

Orange County in Southern California filed the biggest municipal bankruptcy in U.S. history in December 1994 after former Treasurer Robert Citron's wrong-way bet on interest-rate derivatives sold by Merrill Lynch & Co. lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego.

Bankruptcy Stigma

Desert Hot Springs, a town of 20,000 people north of Palm Springs, filed for bankruptcy in 2001, when it couldn't afford a legal judgment of almost $6 million.

Both Orange County and Desert Hot Springs sold municipal bonds to pay creditors and emerge from bankruptcy.

Three years ago, the threat of bankruptcy loomed in San Diego as three mayoral candidates said a filing was one option for dealing with the city's soaring pension indebtedness to police and other employees. Jerry Sanders, who won the election, never pursued that step.

Half Moon Bay, a small town south of San Francisco, has also considered bankruptcy because of a legal judgment handed down in November in a dispute with a real estate developer.

``Bankruptcy is a bad idea,'' Vallejo resident Andy Russo told the council during a standing-room-only informational hearing last night in city hall. ``The stigma of bankruptcy will stick to us for a long, long time.''

Last edited by al_bundy; 04-13-08 at 07:53 AM.
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Old 02-28-08, 02:38 PM
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what exactly happens when a city "files bankruptcy"?
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Old 02-28-08, 02:43 PM
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They should go to loan shark. If they don't pay their vig, break the mayor's legs.
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Old 02-28-08, 02:43 PM
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It can't borrow money at favorable rates for things like public works.
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Old 02-28-08, 02:44 PM
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I have to drive through Vallejo next week. I wonder if they'll be stopping cars and stealing passengers' jewelry and wallets?
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Old 02-28-08, 02:48 PM
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Vallejo is where the Zodiac committed one of his murders.

No real point, I just find it interesting.
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Old 02-28-08, 03:12 PM
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Vallejo is a relatively high crime area in general. I drive as fast as possble through there.
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Old 02-28-08, 03:14 PM
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Can we sell Vallejo to China?
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Old 02-28-08, 03:25 PM
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Originally Posted by X
Vallejo is a relatively high crime area in general. I drive as fast as possble through there.
One of the most liberal cities in the United States as well. I believe at one point they announced they were a sanctuary city for illegals.

Drive faster.
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Old 04-13-08, 07:49 AM
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i think i read somewhere they made a last minute deal with the unions, but an Alabama county is close behind them

the most important part is not why it's happening but that wall street wants them to raise taxes to pay for this deal and the county says no. there are a lot of these interest rate swaps out there so if Jefferson County says no more taxes it may set a precedent

http://www.bloomberg.com/apps/news?p...boA&refer=home

Largest U.S. Municipal Bankruptcy Looms in Alabama: Joe Mysak

Commentary by Joe Mysak

April 11 (Bloomberg) -- They're talking more about Chapter 9 municipal bankruptcy in Jefferson County, Alabama, the home of the largest city in the state, Birmingham.

Who can blame them?

The county is now being whipsawed by an ill-thought-out debt policy and the collapse of the bond insurers. Credit-rating downgrades all around have triggered a series of events that are no longer in the county's control, leaving it at the mercy of securities firms that have little room for maneuver themselves.

This has produced a steady series of stories in my new favorite newspaper, the Birmingham News, all about how the county is preparing to declare bankruptcy any day.

Perhaps the best article ran on Sunday, April 6. It began: ``Jefferson County officials have laid the groundwork for the largest municipal bankruptcy in the nation's history while publicly saying they have no imminent plans for a filing.''

The one that ran on Wednesday, April 9, was no less compelling: ``Talks on the sewer system's debt crisis aren't making progress, increasing the odds that the county will file municipal bankruptcy, Jefferson County Commission President Bettye Fine Collins said Tuesday.''

This is how it ends for the little county that was going to teach America how to use interest-rate swaps.

Make no mistake. This is a story all about public finance and ``derivatives,'' whose use by states and localities exploded during the past decade.

Orange County

The Jefferson County bankruptcy, if it comes, and it's hard to see how it can be avoided, will eclipse that of the 1994 filing by Orange County, California. ``Derivatives'' are at the center of both death-spirals.

Orange County invested in them -- securities whose value was tied to other securities and markets. The county investment pool, which for years spun off handsome returns for the school districts and local governments that were its participants, found itself holding a bunch of junk when its investors asked for their money back.

Jefferson County played the derivatives game as part of financing a $3.2 billion sewer cleanup. The county engaged in a batch of interest-rate swaps with the banks that helped underwrite the debt, in a strategy designed to save the county and its taxpayers some money. The strategy backfired, demonstrating the speculative, risky nature of swaps.

Two Acts

The bankruptcy will be the biggest in the municipal market's history by virtue of the county's debt load, according to the News. Jefferson County has $3.2 billion in sewer debt; Orange County lost $1.6 billion in its investment pool. I'm sure the matter will be debated. I'm also sure Orange County will be happy to pass the crown to Jefferson County.

There are going to be two acts to this drama.

First, of course, is the actual filing itself. The county seems to think that this will allow it to hold its creditors at bay and proceed in a business-as-usual fashion.

County officials have stated they have no intention of cutting back services or raising taxes or sewer fees. The most the county seems willing to do is to earmark part of a school construction sales tax to pay off its now-overdue debt.

``We are dealing with a virtual immovable force on Wall Street,'' the News quoted Commissioner Collins as saying.

I have a feeling that it's not going to work out precisely this way for Jefferson County and its residents. Every municipal bankruptcy is different, as is everything else in Muniland, but go ask Orange County how Chapter 9 worked. It's not going to be painless, no matter how well it's planned out.

The Bottom

The first act is humiliation. The second is recrimination.

The second act of the Jefferson County bankruptcy is going to focus on Wall Street and all the banks, law firms, advisers and consulting firms that helped put the county where it is today. The county was not well-served, for all the money that changed hands. In this act, the county sues to get some of that money back.

And there was a lot of money, which seems to be at the heart of the Securities and Exchange Commission's inquiry into the county and its infatuation with swaps and derivatives. The agency has said it is looking at pay to play, or bankers and others forking over cash in exchange for jobs.

The SEC's investigation is just part of a larger probe into the reinvestment-of-proceeds business across the municipal market in general. This has been going on for years, but there are signs it will erupt with a barrage of criminal prosecutions.

The stock-market guys say you have to reach a bottom before you can recover, and that a bottom is often signaled by the collapse of some big entity. Many people thought it was Bear Stearns Cos. In reality, it's Jefferson County.
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Old 04-13-08, 08:13 AM
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San Diego is next.
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Old 04-13-08, 08:17 AM
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"This time we tried a new method, economics!"
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Old 04-13-08, 09:41 PM
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Not being a jerk, but how and the heck do cities in a state with as much money and populous as California get into financial trouble??? I just don't get it.
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Old 04-14-08, 07:33 AM
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supposedly in california 80% of the budget is spent due to constitutional amendments that people vote on. than you have things like bloated governments and the retirement benefits that were based on 40 year old actuarial tables. and add some unfunded mandates from the federal government like medicaid and other things they say local governments have to pay for
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Old 04-14-08, 12:44 PM
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I guess the best way to avoid government bankruptcy is to not have a state income tax.
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Old 04-14-08, 12:45 PM
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Originally Posted by Sdallnct
Not being a jerk, but how and the heck do cities in a state with as much money and populous as California get into financial trouble??? I just don't get it.

Because governemnt spending keeps rising far faster than the combination of inflation and population growth. The politicians think they can spend their way to prosperity.
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Old 04-14-08, 12:48 PM
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Originally Posted by Sdallnct
Not being a jerk, but how and the heck do cities in a state with as much money and populous as California get into financial trouble??? I just don't get it.
http://www.sfgate.com/cgi-bin/articl.../BANQV90AT.DTL

February 27, 2008

Where else but San Francisco City Hall could a 10-foot-long wheelchair ramp wind up costing $1 million?

Thanks to a maze of bureaucratic indecision and historic restrictions, taxpayers may shell out $100,000 per foot to make the Board of Supervisors president's perch in the historic chambers accessible to the disabled.

What's more, the little remodel job that planners first thought would take three months has stretched into more than four years
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Old 04-14-08, 05:10 PM
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Originally Posted by Sdallnct
Not being a jerk, but how and the heck do cities in a state with as much money and populous as California get into financial trouble??? I just don't get it.

Well for San Diego....

1) Shoddy accounting and projections for public employee pensions/retirement has created a huge deficit.
2) Cap on property tax.
3) Huge drop in tax revenue with falling property values and rising foreclosures.
4) Super high cost of local social services. For the entire state, I heard 1 out of every 4 babies born is paid for by MediCal. Social Services eat up like 1/3 of the states budget. They should pass a law limiting the number of children you can have, based on the income you earn.
5) Loss of state revenue from business taxes with all the companies relocating to Nevada, Texas, North Carolina, etc.
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Old 04-14-08, 06:55 PM
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Originally Posted by wabio
They should pass a law limiting the number of children you can have, based on the income you earn.


What happens if I'm pulling in some major coin, have a few kids, then lose my job? Do I have to give one of them back?
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Old 04-14-08, 07:18 PM
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Originally Posted by wendersfan


What happens if I'm pulling in some major coin, have a few kids, then lose my job? Do I have to give one of them back?
Then you just have to tell them that you are very sorry - but it's scientific experiments for the lot of ya.

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Old 04-14-08, 08:48 PM
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Originally Posted by grundle
I guess the best way to avoid government bankruptcy is to not have a state income tax.
I've lived in Texas (no state income tax) and Arizona (state income tax). Overall, I pay a LOT more in taxes in Texas.
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