There have been three municipalities that have either filed or have voted to approve filing bankruptcy in California in the past year: Stockton, Mammoth Lakes and most recently, San Bernardino. Stockton and San Bernardino went bankrupt due to the “usual” circumstances, they overspent or over-promised services and benefits to their citizens and employees (current & retired) and when the economy slowed, they could not adjust in time. Mammoth Lakes’ filing was due to a $43 million judgement ruling against the city awarded to a developer.
We suspect these filings will not be the last and we remain very wary of California credits. But let’s put things into perspective by viewing the three bankruptcy filings within context of the entire California municipal bond market. There are 58 counties in California, there are 478 cities and towns, 72 college districts, 977 school districts = 1,585 municipalities; Add to that the numerous park districts, community redevelopment districts, fire protection districts, library districts, water utilities, sewer utilities, electric utilities, etc. and you see that 3 bankruptcy filings out of 2000+ municipal entities is about 1/10th of 1-percent, which is not far off from the historical norm.
Could the three become many as municipalities seek an “easy” solution to their problems? According to a recent article from CNN-Money, Chris Hoene, research director at the National League of Cities was quoted as saying, “Most cities are either passing through or over the worst of the economic downturn and should start recovering in the near future. Sales taxes, for instance, are recovering in most locales”. The bankruptcies are “a sign of short-term strife,” he said. “But it’s also a sign they’ve hit bottom.”
While most of the previous comments are specific to California, here are some figures about the improving health of State revenues in general: According to Rockefeller Institute research and Census Bureau data, State tax revenues grew by 3.6 percent in the fourth quarter of 2011, marking the eighth consecutive quarter that states reported growth in collections. The Rockefeller report goes on to state, “Overall state tax revenues are now above peak levels that came several months into the Great Recession. In the fourth quarter of 2011, total state revenues were 3.0 and 7.4 percent higher than during the same quarters of 2007 and 2008, respectively.”
We hope that you find this information to be helpful and as always, if you have any questions, please contact your Bernardi Securities Investment Specialist.
Jeffrey D. Irish
Justin Formas, CAIA
Director of Municipal Bond Credit Research