California State Comptroller John Chiang said in a press conference yesterday in San Francisco that he expected more municipal bankruptcies in the Golden State. Bloomberg has the details:
“We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said. “We need the state to participate in trying to prevent these bankruptcies.”
California cities that have hit their fiscal bottoms have been turning to the Chapter 9 municipal bankruptcy process. Recently, Stockton, Mammoth Lakes and San Bernardino voted to put themselves under the protection of a bankruptcy judge and shield themselves from new legal claims. Bankruptcy is a complex and expensive process. Fitch Ratings said in a recent report (page 5) that the state of California offers no other intervention process for broke cities.
California has an effective mechanism to support school districts that experience financial distress, but provides no such assistance for cities. Many states have some form of intervention program that can help turn around financial decline by providing a control board, financial manager, or similar structure. In 2011, the state enacted Assembly Bill (AB) 506, which provides for a mediation process among localities and their stakeholders prior to bankruptcy.
Rather than preventing default and bankruptcy, AB 506 may have accelerated their occurrence. While state intervention is not factored into ratings unless the program is invoked and proven effective, Fitch believes credit deterioration can be forestalled for an entity in a state with an effective intervention program.