Moody’s Warns of Mass California Municipal Bankruptcies

by Chriss Street

The klaxon horn went off this evening for California municipal bondholders when Moody’s credit rating service issued a report stating that the plummeting financial condition of many California counties, cities, school districts and other government agencies will soon result in large numbers of municipal bankruptcy filings.  Concerned about their own potential liability for providing high ratings that encouraged conservative elderly Americans to invest in risky bonds; Moody’s announced they will undertake a wide-ranging review of municipal finances because of the growing insolvencies.

The Moody’s report comes just two days after we reported that “CALIFORNIA SALES TAX REVENUE NOSE-DIVES BY 33.5%.”  Stock brokers have often recommended California municipal bonds as very safe investments, due to historically low default rates and relatively stable finances.  But Moody's said that outlook is changing after the Chapter 9 Bankruptcy filings of Stockton, San Bernardino and Mammoth Lakes.

Moody’s is especially concerned with the growing attitude among many cash-strapped cities that filing bankruptcy to avoid paying bondholders, is politically more advantageous than cutting spending.  As a result, Moody’s will re-assess the financial condition of all California cities, which issues about 20 percent of the municipal bond volume nationwide, "to reflect the new fiscal realities and the governmental practices." 

The Moody’s report said the credit rating service will also examine the outlook for municipal bonds in other troubled states.  Robert Kurtter, Managing Director of public finance at Moody's, would not say which states they will review, though Kurtter mentioned Michigan and Nevada as possibilities. 

Tonight’s report noted that many cities across the nation are in financial distress, but emphasized that a greater share of bankruptcies are expected to come from California.  Local officials were quick to try to downplay this grim forecast.  Chris McKenzie, Executive Director of the League of California Cities responded: "Moody's has an obligation to review changing circumstances, but we would just suggest that their assessment of the framework and ground activities is perhaps exaggerated.”

Tom Dressler, spokesman for California State Treasurer Bill Lockyer, cautioned against overacting to only three bankruptcies from California's 482 cities: "No city's going to blithely skip into bankruptcy court to avoid its obligations." Mr. Dressler called the report "a little hyperbolic."

Moody’s detailed that over 10% of California cities have already declared fiscal crises, with the most troubled areas lying inland in the middle of the state and east of the Los Angeles area.  Mr. Kurtter said the declarations of emergency were "a reflection of the broader fiscal stress in the state" and went on to warn that Moody's may issue an  “across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two” for all California cities.  Chris McKenzie acknowledged that such a move "would have a terrible impact on taxpayers."

Moody’s highlighted growing doubts that cash-strapped cities are willing making good-faith efforts to pay their bonds debts in full.  Former Treasury official Paul Rosenstiel, a Principal at DeLaRosa & Co municipal bond investment-banking firm in San Francisco stated: "Credit analysis is based on the ability to pay and the willingness to pay.  Investors have historically assumed that cities are willing to pay their debts because they want continued access to the bond market” … “What is being considered is whether the willingness to pay is something that needs to be factored in more than in the past — and if so, how would you measure it?"

California cities already pay higher interest rates to borrow money from municipal bond investors because the state has the second lowest bond rating in the nation, only Louisiana is lower.  But if any city’s credit rating is cut to the “junk bond” level, rates would rise so high that the city would be forced to file bankruptcy.   Most cities are already are financially deteriorating, because of a steep drop in tax revenue. 

The Moody’s report is raising alarms for city leaders who fear it may trigger a market panic.  "Every city in the state is looking on with some concern," said Dave Vossbrink, spokesman for the city of San Jose.  "Governments of all kinds borrow money, usually to build infrastructure that lasts a long time.  It's like getting a mortgage to build roads, a sewage plant, whatever it might be."  Mr. Vossbrink emphasized that San Jose has cut laid off cops and closed libraries.  Residents also recently voted to cut public pension benefits for city workers, but those cuts may not be enough prevent a downgrade.

Moody's said it will conduct in-depth financial stress tests for all California cities in the coming weeks and issue appropriate downgrades in September.  The timing of the Moody downgrades may be especially devastating for the California state budget.  Governor Jerry Brown kicked off his drive this week to save the state’s solvency by encouraging voters to pass an $8 billion tax increase initiative on the November ballot.  But bad press and rising bankruptcies is sure to undermine voter support.   

Chriss Street and Paul Preston Co-Host
“The American Exceptionalism Radio Talk Show”
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California Sales Tax Revenue Nose-Dives by 33.5%

 By Chriss Street

We were severely criticized last week by the left and the right for publishing “CALIFORNIA DEFAULT RISK TURNS BROWN INTO A CAPITALIST.” The report highlighted that California Governor Jerry Brown is steam-rolling environmentalists and regulators to generate more state tax revenue by expediting approval of pro-business infrastructure. But our detractors were stunned to learn from State Controller John Chaing that California’s July sales tax revenue was down 33.5% from the Budget approved in late June. Even more ominously, the state’s $9.6 billion cash deficit that was rolled over from the June 30th fiscal year has catapulted to $18 billion last month.

The state has avoided default by temporarily borrowing from state trust funds, but those accounts will soon need their cash back to continue operating. Today California quickly began trying to sell $10 billion in municipal bonds to fund the record $28 billion they need to keep the lights on. With tax revenue plummeting and the state already the second lowest rated credit in the country, if the independent credit rating agencies downgrade the state to “junk bond", California will be short up to $18 billion and default.

Governor Brown used his line-item veto authority to strike $128.9 million in spending from the $91.3 billion California general fund before signing the state budget. Brown’s cuts surprisingly hit Democrat priorities, such as spending for child care and preschool for low-income children, and closing 30 state parks. But Republican Senator Tom Berryhill warned Brown: “This budget is a slow-motion train wreck, and you’re driving the bus.” Berryhill criticized Democrats for failing to reign in public pensions, regulatory terrorism and cap state spending that Republicans say are all needed to rescue state government. But by agreeing to sign the budget before the June 30th end of the fiscal year, Brown spared all the California legislators from losing their paychecks under a voter-approved initiative that blocks their pay if a budget is late.

The governor justified signing the budget based on the twin assumption that the California economy was expanding and the voters would approve his tax initiative that would raise $8.5 billion. Many analysts doubted the voters willingness to vote to raise sales tax on themselves, but we were virtually alone in warning California’s shallow economic recovery had peaked and the state was at risk for a double dip recession.

State Controller John Chiang tried to rationalize that even though California revenues were “disappointingly” down $475 million in July: “However, because spending appears to be tracking and the funds that the State depends on for liquidity are performing well, California’s cash outlook remains stable." This is sort of like the pilot of a jumbo jet announcing to the passengers that as a safety precaution they may want to cross your arms over your calves and grab your ankles and to brace yourself for possible impact.

Chriss Street will be in Studio with Paul Preston on “The American Exceptionalism Radio Talk Show” Streaming Live Monday through Friday at 7-10 PM Click here to listen: http://www.mysytv.net/kmyclive.html

California’s Looming Default Triggers Brown’s Metamorphosis from Socialist to Capitalist

CALIFORNIA DEFAULT RISK TURNS BROWN INTO A CAPITALIST

By Chriss Street

	There is nothing like the threat of insolvency and a downgrade to junk bond status to motivate traditionally liberal politicians to abandon the environmentalists who heavily fund their campaigns.  Last week Governor Jerry Brown of California tossed one of his core campaign-bundling constituency under-the-bus at a bill-signing event in downtown Los Angeles.

 As Brown signed his third measure this year that dramatically narrows the “sustainable” crowd’s ability to use litigation to delay or kill capital projects, the governor said it is time for, "big ideas and big projects," especially ones to "get people working."  With the pace of public insolvencies and Chapter 9 municipal bankruptcy fillings accelerating across the U.S., Brown is the vanguard for high profile progressives willing to bet that capitalism can pull them back from the precipice of disgrace and potential recall. 

For most of Edmund G. "Jerry" Brown Jr.’s first tour as governor from 1975-1983, Gray Davis served as his Chief of Staff and when Brown was campaigning for President, Davis ran California in Brown's absence.  In 1998 Davis was elected governor by an overwhelming 20% margin.  In the next 1,778 days Davis went on a liberal borrow and spend blitz by signing 5,132 bills; including huge pension spikes for public employees, public control of electricity purchasing, substantial increases in school spending, the nation's first state law requiring automakers to limit auto emissions and even tried to pass gun control.  But when the economy turned down after 9-1-1 and the credit rating agencies’ downgrades sent California into a financial crisis, Davis became only the second governor in American history to be recalled by voters. 

The recall of Davis sent a scare through politicians across the nation about the need to control spending and become more pro-business.  But with real estate prices skyrocketing, state and local government revenues exploded to the upside.  Spending accelerated even faster than rising revenues as governments borrowed heavily on the hope of an endless rise in property and sales taxes.

When the Great Recession hit in 2008, state and local governments kept borrowing and spending, because they enjoyed huge “stimulus” transfers from the Obama Administration and a two year lag before tax revenues began to fall.  But In 2011, state and local spending fell for the first time since 1946.  This year, government entities face steep budget deficits and are struggling to pay-off debts accumulated over prior years. 

The Moody’s and S&P credit rating agencies that provided the “investment grade” credit ratings encouraged investors to buy many dicey municipal bonds, now fear they may have liability and are actively slash many ratings.  As ratings levels have hit “junk bond” status, 26 municipalities filed for bankruptcy since 2010.  Three California cities have filed bankruptcy over the last 60 days and Fresno, Duarte, Compton, San Jose and other cities have acknowledged they are in financial crisis.  

More ominous, for sixty years municipal debt increased annually, but this year for the first time the municipal bond market will face the “August Cliff”.  This is an event where more money will flow out of government coffers to pay-off maturing debt than will come in from expanding new bond sales.  With credit ratings falling and media-driven fear rising about the "Mounting Muni Meltdown”, it is only time before conservative investors become reluctant to put their cash back to work in municipal bonds.  

Governor Brown is on a pro-development tear.  He shocked the “greens” last week by joining U.S. Department of the Interior Secretary Ken Salazar in announcing plans to build two massive tunnels under the California Delta at a cost of $23.7 billion to carry water from the Sacramento River to connect to the California Aqueduct to quench Southern California’s thirst for new land development, while generating more property and sales taxes.  The next day he dedicated the 117-mile Sunrise Powerlink transmission line that can carry 1,000 megawatts of energy from the Imperial Valley to San Diego – the first major new power lines to connect to San Diego in over 25 years. 

Governor Brown is painfully aware that California already has the second lowest state municipal bond rating in the United States and that Moody’s recently warned they plan to issue California a downgrade soon, possibly to junk.  My analysis indicates that approximately 20% of cities, 30% of redevelopment districts and a number of counties in California may file for bankruptcy in the next 2 years.

  

Jerry Brown’s father, former California Governor Pat Brown, first ran for State Assembly as a Republican in 1928, but lost and later joined the Democratic Party.  Pat Brown's two terms as governor were marked by working closely with the pro-growth private sector to build the enormous California Aqueduct, enact the California Master Plan for Higher Education and found the state economic development commission.

Governor Jerry Brown seems to have re-embraced his father’s belief in building infrastructure to support private-sector growth to rehabilitate California.  When Governor Jerry Brown was asked why he has signed three bills this year to limit challenges to major infrastructure projects by the state’s restrictive California Environmental Quality Act, Brown responded, "I've never seen a CEQA exemption that I don't like."

Chriss Street will be in Studio with Paul Preston on “The Inside Education”; Streaming Live Monday August 6^th through Friday August 10^th, 7-10 PM

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California's Triple Threat

 05-24-2010 07:30 PM

Rancho Santa Margarita, CA -  We assert that the sucking sound you hear are all the jobs California is losing to Nevada, Texas and Utah, in large measure do to what we refer to as California's Triple Threat:   1) Public sector organized labor,  2) un-elected, un-checked parasitic bureaucracies and 3)  lobbyists. 

Unfortunately, OCGOP Chairman Scott Baugh is not too familiar with the Triple Threat:  " the bureaucracy and the unions are hand in hand.  Any real reforms to the bureaucracy will be blocked by the Democrats in the legislature. " he says, echoing Assemblyman Chuck DeVore previous "I can't do anything" statement.  "It is my fundamental belief that until you break the grip that unions have on the legislature, you will not make much progress on busting the bureaucracies.  The Citizen Power Initiative is one excellent idea.  The pension reform initiative that was being circulated is another excellent idea.  In addition to these initiatives, there is an effort underway to provide education to local elected officials in the art of negotiations and the pitfalls of the MOU’s that are presented to them."  Chairman Baugh added.

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Organized labor

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