Counterparties: Another day, another city
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The San Bernardino City Council made the decision after a report by staff said it would run a deficit of $45 million in its current fiscal year and that further cuts were not possible: “The city has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year”.
In the short term, this means San Bernardino will stop making payments on debt and attempt to find some sort of fiscal path forward. As Matthew DeBord notes, San Bernardino could come “out of bankruptcy with its debt reorganized and with a better chance to have a balanced budget and a reserve fund in the future”. However, debt payments are a small portion of the city’s deficit, so even under that rosy scenario, the city faces tough choices elsewhere. (The city is also contending with allegations of more than a decade of misreported city fund balances).
Twenty percent of the city’s workers have already been laid off, and many have taken pay cuts, DeBord reports. A recent auditor’s report noted that 31% of the city’s revenue comes from property taxes, and recovery to pre-housing-bubble levels seems unlikely. There’s also the issue of how to right-size spending on vital services like police and fire. Fellow bankruptcy-seeker Stockton, MuniLand’s Cate Long notes, “[admitted] that the city has had little-to-no success in getting the pay of its public safety workers under control” and sought bankruptcy, in part, to renegotiate union contracts. The picture is brighter for San Bernardino, which spends only 42% of city funds on public safety, compared with Stockton’s 76%.
Although San Bernardino’s looming bankruptcy is having “basically having zero impact” on the bond market, there’s a bigger issue here. State and local government spending is in long-term decline: Two prominent forecasters expect it to fall to 10% of GDP by 2020 from 11.9% last year. Meredith Whitney may have been wrong about mass muni defaults, but we’re still seeing cities coming within just a few thousand dollars of insolvency. – Ben Walsh
On to today’s links: