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The Ripple Effect of California's Bankruptcies


In the latest sign that some U.S. cities are barely making ends meet, the city of Oakland, California Thursday priced a $211 million taxable bond which will help it cover pension obligations. Yes, borrowing money to cover retiree pay.

Moody's Investor Service has proposed adjusting its U.S. public sector pension data to put the unfunded liabilities at $2.2 trillion, nearly triple what they were two years ago.

While market reaction to San Bernardino's pending bankruptcy has been "much calmer than expected," Envision Capital's Marilyn Cohen added, "people are asking 'Is Riverside next?'" referring to the other major city in California's Inland Empire.

The heat from three California bankruptcies in two weeks is fanning out like a late summer brushfire. Los Angeles County officials have ordered a review comparing their financial practices to now-bankrupt Stockton.

Compton's auditors just quit and refuse to sign off on the city's financial reports.

"I wouldn't be surprised if there were more (bankruptcies) in California or around the country," said Amy Laskey, managing director for tax-supported public finance for Fitch Ratings. "But I don't think it has implications for another filing every week. I don't think that's going to happen."

Some analysts point to reports that municipal bond defaults are slowing, despite the headlines. The Bond Buyer says a healthy $7.1 in muni debt is coming to the market this week.

But everyone wonders, who's next?

"We have not even looked into or discussed bankruptcy," said Dan Romero, Mayor of Hercules, a small city just nine miles from Vallejo, California, which infamously kicked off the current round of municipal bankruptcies in 2008. Hercules has been struggling, and the state controller reportedly called its financial records the worst he's seen.

"I understand that we're sort of the banner child for what not to do as an RDA (redevelopment agency)," Mayor Romero said, "but we're turning those things around."

Hercules has renegotiated debt payments, slashed staff and pay, and voters approved a half cent sales tax increase.

"What we've been doing for the last couple of months is selling our assets so that we can pay off our debts," Romero said.

The city of North Las Vegas, Nevada, has declared a fiscal emergency in hopes of avoiding bankruptcy, which in Nevada can only be done with the legislature's approval.

"We currently are current on all of our indebtedness," City Manager Tim Hacker said.

He said the city is also making payroll and pension obligations. The fiscal emergency allowed the city to avoid contracted raises after efforts to get more union concessions failed. Hacker feels the city can avoid Chapter 9, but he's not so sure about his neighbors in the west.

"We believe that what has maybe been the tip of the iceberg is really going to start to unfold here in the next few years," he said.

Maybe not. The new wave of bankruptcies is bringing all sides together in many cities to hammer out concessions. Voters and San Jose and San Diego approved cuts to current pay and benefits, decisions that may end up in court. And then there's the economy.

"We are starting to see some growth in non-property tax revenues, and I think some of the spending cuts that have been done in the past couple of fiscal years will bear more fruit going forward," Fitch's Amy Laskey said. "I wouldn't think that there is going to be a massive Chapter 9 filing situation."

— By CNBC's Jane Wells
@janewells

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