What happens when a city goes bust?

[Gob]

a new phenomena...

The Californian city of Stockton is set to become the largest US city to declare bankruptcy.

Mayor Ann Johnston told the city council which endorsed the move it was "the most difficult and heart-wrenching decision" they had ever faced.

But she said it had to be done to begin the recovery process.

The river port city of 290,000 - which lies 90 miles (144km) east of San Francisco - suffered badly during the US housing market crash.

Filing for Chapter 9 bankruptcy protection would allow the city to hold some of its creditors at bay while still paying for basic services like its police and fire department.

The city is facing a projected $26m budget shortfall and a bankruptcy filing could come as early as Wednesday.

The housing boom was good to Stockton. Flush with property tax, the city developed its waterfront, with a new marina and sports complex, and negotiated generous pension and healthcare benefits for city employees.

But in the past three years, officials in the city have dealt with $90m (£57m) in deficits through a series of drastic cuts.

They eliminated a quarter of the city's police officers, one-third of the fire staff, and 40% of all other employees. They also cut wages and medical benefits.

Stockton's unemployment and violent crime rates now rank among the top in the nation. One in every 195 Stockton homes filed for foreclosure in May, according to RealtyTrac.

More than 15% of the population of Stockton is unemployed - nearly double the national average.

City buildings have been repossessed and "Out of Business" signs are a common sight.

City Hall was due to move into a new building, but since Stockton has run out of money, the new building has been repossessed.

Mike Brooking, 50, a Stockton native and coffee shop owner, blames city officials. He says they paid people unreasonably generous pensions and medical benefits.

"They gave employees guaranteed healthcare when they're gone - and their families," Mr Brooking said.

"To people who worked there for one month! They couldn't afford it then. They can't afford it now. No-one else has those guarantees.

"The fact is that the police department is shrunk and crime is crazy and there are no jobs. I think this is going on throughout the whole Central Valley, in the whole country and Europe."

http://www.bbc.co.uk/news/world-us-canada-18605326

[Long Run]

Actually, it has happened before, just not for a city this large. Obviously, this strategy for dealing with sizeable debts is more likely to occur for cities that are not recovering from the recession. Stockton is a good example of a city that expanded in the real estate boom and then lost a big portion of its tax base when the thousands of new homes valued at $250,000+ lost over half their value in the space of a year or two. Not sure why anyone thought Stockton would be a good place for a real estate boom, though apparently there were workers in Bay Area 90-120 minutes away who chose to live there for the affordable housing!

[Gob]

What has happened where it is occurred before L-R? Has the city restructured its finances and made its way out of debt?

[Long Run]

Yes Gob, that is exactly what happens. In the Orange County, California bankruptcy, employees lost some of their own retirement money (i.e., money they deferred from their own paychecks); Congress changed the law to protect those assets from general creditors. This is in contrast to strategies to get out of retirement obligations that require the city or county to pay large amounts in the future, which can be done depending on the jurisdiction.

[Gob]

Thanks mate, that's dead interesting!

[Scooter]

Yes Gob, that is exactly what happens. In the Orange County, California bankruptcy, employees lost some of their own retirement money (i.e., money they deferred from their own paychecks); Congress changed the law to protect those assets from general creditors. This is in contrast to strategies to get out of retirement obligations that require the city or county to pay large amounts in the future, which can be done depending on the jurisdiction.

You make it sound as if the cause of the bankruptcy was overly generous retirement benefits. The bankruptcy came about because the county treasurer borrowed huge sums of money to invest in highly speculative derivative instruments and ended up losing $1.5 billion. County politicians were not exercising enough oversight over investment activities, and investment bankers were all too willing to lend the money because they saw huge profits to be made (sound familiar?) Oh yeah, and taxpayers didn't ask any questions about how the county could afford the services they were being provided on the comparatively low taxes they were paying.

[dales]

Letuce not forget Vallejo, CA...........

http://online.wsj.com/article/SB1000142 ... 04074.html

VALLEJO, Calif.—City leaders say they expect Vallejo to emerge from bankruptcy protection by July as settlement talks with its creditors near final agreement, in a case being closely watched by the municipal-bond industry and by financially stricken cities across the country.

Vallejo, which filed for Chapter 9 protection in 2008, represents the biggest municipal bankruptcy in California since Orange County filed in 1994 and one of the largest in U.S. history.

In January, the city of 120,000 people some 30 miles northeast of San Francisco submitted a plan to exit from bankruptcy and began negotiating on a debt restructuring with major creditors. City leaders secured deals with Vallejo's largest debt holder—Union Bank of San Francisco—and bond insurer National Public Finance Guarantee Corp.

Vallejo, Calif., hopes to emerge from bankruptcy soon. Other troubled municipalities:

Officials faced pushback from lawyers representing city-worker retirees and some city unions, who objected to early versions of the plan because they lacked details on how some creditors would be treated. But recently the groups indicated they approve of the measures.

"We're satisfied with progress so far," said Kelly Woodruff, an attorney representing two city unions.

Under the plan, city employees will maintain their current pay and no additional jobs will be cut. But health-care benefits will be reduced for Vallejo's more than 400 city-worker retirees and surviving spouses, with the city contributing about $300 a month to premiums, down from about $1,500 for some retirees. Current pension payouts will remain in place.

In the years leading up to the filing, the city's expenses grew 11% annually while revenue rose only 3%. Vallejo was also saddled with contracts with its police and fire unions whose salary and benefits took up more than 70% of the city's $65 million budget.

Those public-safety workers whose pay and benefits make up more than 70% of the city's general-fund budget of about $65 million this fiscal year, took a big hit from the bankruptcy. The city scaled down its police force from a high of more than 150 officers to 90 today, and it closed three fire stations and cut the number of firefighters to 70 from more than 120. Funding for libraries, recreation centers and a convention center was also reduced.

In 2009, city leaders reached new agreements with the police, fire and management unions that reduced pension benefits for new employees, among other cuts. Last year, the city reached similar agreements with the union representing administrative workers.

Original bondholders have emerged from the reorganization unscathed, with the city having either repaid much of this debt or pledged to continue repayment. But Union Bank, owed about $50 million after guaranteeing debt repayment to investors, will receive 40% less than this amount under the settlement. Lawyers representing Union Bank declined to return emails and phone calls seeking comment.

National Public Finance Guarantee fared better, securing a deal allowing the insurer to continue to receive payment of nearly $5 million in debt owed, but over an extended period of time. The insurer also reached an agreement in a dispute with the city and California to guarantee that, in the event of a Vallejo default, the insurer would receive payment from state vehicle-license feeshanded down to cities.

"We are pleased to have reached an agreement," said Kevin Brown, a spokesman for National Public Finance.

Dave Millican, Vallejo's interim finance director, said, "We've turned the corner because our creditors realize it's unlikely they will be able to get more money from the city."

Creditors became pragmatic after U.S Bankruptcy Judge Michael McManus in the Eastern District of California said he wouldn't force more concessions from Vallejo, Mr. Millican said.

Marc Levinson, Vallejo's bankruptcy attorney, said the city's ordeal was a cautionary tale for municipalities seeking an exit from financial troubles. The bankruptcy had cost Vallejo more than $9 million, largely from legal fees, he said, and services had been severely curtailed.

Lawyers representing retirees and unions attempted to fight the settlement plans, arguing that guarantees from Vallejo to continue pension payouts and payments to bondholders indicated funds were still available, according to court documents. Retirees wanted to reinstate benefits, while unions pursued funds lost in a fight over labor contracts.

Vallejo is expected to submit a final exit strategy, incorporating deals reached with creditors, by mid-May and a hearing for a final vote is expected in late June.

The plan calls for the city to defer debt repayments from its general fund until 2013. It also calls for some employees and retirees to be paid just 5% to 20% of some other claims, such as workers' compensation, out of a $6 million fund over two years.The city set aside money from its reserves to establish the fund.

[rubato]

"...
"We are pleased to have reached an agreement," said Kevin Brown, a spokesman for National Public Finance.

Dave Millican, Vallejo's interim finance director, said, "We've turned the corner because our creditors realize it's unlikely they will be able to get more money from the city."

Creditors became pragmatic after U.S Bankruptcy Judge Michael McManus in the Eastern District of California said he wouldn't force more concessions from Vallejo, Mr. Millican said.
... "

That magic moment when a creditor realizes that part of a loaf really is better than none.

yrs,
rubato

[Gob]

San Bernardino on Tuesday became the third California city in less than a month to seek bankruptcy protection, with officials saying the financial situation had become so dire that it could not cover payroll through the summer.

The unexpected vote came at the suggestion of the interim city manager, who said the city faces a $46-million deficit and depleted coffers.

"We have an immediate cash flow issue," Andrea Miller told the mayor and seven-member City Council.

Discuss at 1 p.m.: How many other California cities face bankruptcy risk?

Mayor Patrick Morris called the decision, passed on a 4-2 vote, a "stain" on the city. But he said the only other option was "draconian cuts" to all city services, including the police and fire departments.

"It means the bills will be paid," said a dejected Morris, who is not a voting member of the council.

The city's fiscal crisis has been years in the making, compounded by the nation's crushing recession and exacerbated by escalating pension costs, lucrative labor agreements, Sacramento's raid on redevelopment funds and a city reserve that is tapped out, officials said.

Miller told the council that the city faced major deficits for the next five years.