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Stockton’s Going Out of Business Sale

March 30, 2013

The city of Stockton California is in bankruptcy court this week with a verdict expected on Monday, April 1st.  The city played a political game and they played it well.  They promised more than they could pay and the special interests have bled the city for some time.   Workers received above average income and benefits.  They still do.  The city didn’t pay pension and insurance costs as they accumulated so now the city has huge debts.  Who will pay when the city can’t pay its debts?  Will it be the city bond holders, city retirees or city taxpayers?  Cities compete for businesses and residents, and now Stockton is at a considerable disadvantage. stockton arena

Case 1- The court could discharge the city’s bond debt and leave these bond holders with worthless paper.  Watch what happens next.  The municipal bond credit rating agencies will look at every city in California and see that most of them are in a similar situation to Stockton.  Most have underfunded their pensions and insurance plans.  The cities justified this by claiming that city population would continue to grow and property values would rise.  Those assumptions were wrong.  Jobs left and citizens left with them.  The bond ratings of many California cities will fall.  The next city in California that wants to borrow money will face much higher interest rates and some cities will not be able to borrow at all.  The financial house of cards will quickly crumble.  Some cities will radically reduce their budgets given that these same cities are borrowing to pay current expenses and salaries.  Some services will be outsourced.  Some employees will be let go.  Some benefits will be cut back and the municipal unions will howl.  In some cities, the current taxes and fees will not pay the unfunded pension liabilities even if there are no current employees and city services.  What happens once you live in a bankrupt paper town that doesn’t really exist?  I can imagine the state government using state pension funds to buy worthless city bonds and so protect unionized municipal workers.  Only votes count in politics.  Justice certainly doesn’t.

Case 2- The court could reduce the benefits promised the retirees.  The retirees will immediately appeal the ruling and demand an injunction forcing the city to continue paying benefits while the ruling is appealed.  This appeal could take years.  The cities will quickly run into a fiscal crisis where they cannot pay both the bond holders and the bloated operating costs.  The bond rating agencies lower the city credit ratings and the city’s future looks like case 1 again.

Case 3- The court could decide to increase taxes on the shrinking number of city residents.  Residents complain, but they lack the political clout of the state-wide unionized municipal workers.  Taxes rise and housing prices begin a downward slide.  There will be a slight legal tussle as the city requires city workers to live within the taxable borders of the city.  More retired government workers leave the city.  Eventually businesses have trouble finding skilled local workers and more businesses leave the city.  The city sets up a real estate purchase plan to stop the slide of housing prices.  This slightly raises the “market” price of housing but the plan also takes more housing off the tax roles.  The city can’t borrow as their bond ratings crash.  We’re left with a hollow shell of a city as we currently see in Detroit.

I predict the judge will choose the third case.  One reason is that the tax payers are the least organized political voting block.  The second is that screwing the taxpayers prolongs the sick system for the longest time and so maximizes the take for the well represented government bureaucracy and the union campaign donations they provide.  I hope home owners in the city of Stockton have their house ready for real estate open house.  Is there a way to make money through hedge options as real estate prices crash?

I thought slavery was illegal in the US, but that doesn’t apply to California bankruptcy law.

~_~_

Rob

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