Counterparties: Another day, another city

By Ben Walsh
July 11, 2012

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This is no Meredith Whitney-sized apocalypse, but it’s worth noting that San Bernardino is the third California city in two weeks to seek bankruptcy.

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:

Interesting
Income distributions for Major League Baseball and the US as a whole are surprisingly similar – BMO
Muni bonds’ tax-free status limits their appeal to investors – Josh Barro

Inefficient Markets
More than 80% of the US equity premium is gained in the 24 hours before Fed announcements – Liberty Street Economics

Tax Arcana
In 2009, Americans paid the lowest federal tax rates in 30 years – WaPo

JPMorgan
JPMorgan may claw back millions in pay from execs over the London trading scandal – WSJ

EU Mess
Under bailout terms, Spain may cede bank control, while investors face haircuts – WSJ

Take Your Time
Regulators have met just 37% of Dodd-Frank’s rule-making deadlines – Politico

Apropos of Nothing
The value of the general manager: Why corporations need more Michael Scotts – HBR Blog
Blame horses for pants – Alexis Madrigal

Appropriately Surly
Krugman: “I just did Squawk Box … it was one zombie idea after another” – NYT

MF Doom
US Bank is being drawn into the PFG investigation – WSJ

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