City bankruptcies are tough

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webmaster | 07/19/12
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During the past few years, 254 municipal entities across the nation have filed for Chapter 9 protection, also known as bankruptcy. Most of the filings have come from school districts or hospitals, but more recently entire cities have declared themselves to be insolvent. The problem that has become evident is that their revenues (income) cannot possibly satisfy their obligations.

It became national news when Stockton declared bankruptcy on June 27 of this year. Stockton, with a population just under 300,000, is the largest American city to take this drastic measure. Then, last week, San Bernardino, with a population of 260,000, signaled it was inclined to file for bankruptcy, too. It would be the second-largest city — behind Stockton — to seek Chapter 9 protections.

Like many California cities, Stockton experienced a huge property “bubble” during the early years of the 21st century. City leaders assumed that the rising cost of housing would continue to swell municipal coffers, so officials entered into contractual agreements with employees, including generous pensions, that became unaffordable after the bubble burst. During good years (when revenues were high), employees got 7 percent raises, but during bad years (when revenues dropped), employee raises declined to 2.5 percent.

Homes and bonds

In 2000, the median price of housing in Stockton was not too different from Madera, about $110,000. But, by 2005, those same houses were selling for $400,000. That was the “bubble.” The “burst” began in 2006 as the cost of housing declined. Between 2006 and 2009, the price of a home in Stockton fell 70 percent, back to 2000 levels...

 

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