Atwater is the next California Municipal Bankruptcy

 by Chriss Street

Atwater, California just admitted they do not have the cash flow to make a $2 million municipal bond payment due in November and may become the 4th local California government file for Chapter 9 municipal bankruptcy this year

. The 28,000 resident community farming community has been strangled for over the battle with environmentalists more interested in protecting the lifestyle of a three inch fish called the Delta Smelt than family farms. With the city burdened with crippling unionized public employee wage and pension costs, while private sector wages and property values drop, Atwater is the latest in a soon to be tidal wave of local government failures.

Beginning in 2007, Federal Judge Oliver Wanger imposed limits on the amount of water pumped from the San Joachin-Sacramento River delta to farms in California's Central Valley in order to protect a two-inch endangered fish called the Delta Smelt. As a result, hundreds of thousand acres of farmland lie fallow, and tens of thousands of jobs were lost. Over 200,000 farmers, migrant workers and their family members were financially devastated. Homeless shelters and bread lines were overwhelmed as crops withered and banks foreclosed on family farms. Local public schools continue to report rising malnutrition as many proud families are too embarrassed to take government welfare.

When the U.S. House of Representatives Congress passed San Joaquin Valley Water Reliability Act (H.R. 1837) to try to restore the water flow, but California’s two U.S. Senators, Barbara Boxer and Dianne Feinstein, fought off the legislation in July by convincing President Obama’s senior advisors to recommend a Presidential veto. A disgusted Speaker of the House John Boehner said on the House floor that using the Endangered Species Act to protect a fish at the expense of food production and economic growth is “a perfect example of the overreach of government”.

The median home price in Atwater has plunged from $336,000 in June of 2007 to just $140,000 today and unemployment has surged to 21%. The 2010 Atwater median household income was $42,226, 19% below the national average of $51,914. Almost a fourth of the population is now considered below the poverty line, compared with 13.7 percent statewide, according to U.S. Census figures.

Even with all this pain and suffering, Atwater’s city tax revenue fell by only 20% since its peak in 2007. Atwater did reduce its bloated union payroll from 120 to 80 since 2008, but mostly through attrition and laying-off low paid younger workers. To keep the lights on the city depleted its cash reserves, while union wages continued to rise and the cityagreed to pay all general employees’ portion of mandatory pension contribution and all but 2% mandatory contribution for highly paid police and firefighters. The city’s also continued to pick up most of the cost of health-care premiums that rose by 15% this year and are scheduled to rise 10% next year.

With the threat of bankruptcy, wages may now be slashed. According to Atwater Mayor Joan Faul, “We just started negotiating with our unions and they are going to have to take a major cut," Mayor Joan Faul said. "We hope that once we declare a fiscal emergency that they will realize that we are definitely in an emergency. If they want to save all the jobs, everyone is going to have to take a cut."

Standard and Poor’s seems to have been shocked to learn that city is broke and hacked Atwater’s Public Financing Authority’s wastewater revenue bonds solvency rating on September 24th from a strong credit-worthy A rating to a BBB- junk-bond rating.

Under a state law passed by California’s ultra-liberal legislature and signed by Governor Jerry Brown last year, cities seeking bankruptcy protection are forced to first declare a fiscal emergency or hold talks for 90 days with creditors through a mediator or wait for 60 days if they run out of money. With Atwater and many other local government cities and agencies about to bounce payroll checks, California bankruptcy courts are going to need to go on a hiring binge to handle the coming long lines of municipal failures.

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FEDERAL RESERVE WARNS MUNICIPAL BONDS VERY RISKY

by Chriss Street

	Last week we first reported that California Sales Tax Revenue Nose Dives by 33.5% for the month of July, and then Moody’s Warns of Mass California Municipal Bankruptcies. During the “Great Recession” of the last four years, the California private sector was forced to slash

 employment and infrastructure spending, but the public sector made only modest cut backs. Much of this state and local spending was funded by selling municipal bonds to elderly investor who were told the “muni market” was safe, because the default rate is very low. But a new Federal Reserve study: “The Untold Story of Municipal Bond Defaults”, debunks that municipal bonds are safe investments and blames the Moody’s and S&P credit rating agencies for deceiving the public. This is sure to fan the flames of the growing panic among holders of California municipal debt

According to the August 15th report the by the Federal Reserve of New York:

“The $3.7 trillion U.S. municipal bond market is perhaps best known for its federal tax exemption on individuals and its low default rate relative to other fixed-income securities. These two features have resulted in household investors dominating the ranks of municipal bond holders.”

Individuals own three quarters of all municipal bonds; with $1.879 billion held directly and another $930 billion through investments in mutual funds. The Fed report emphasized that the perception of a low historical default history of municipal bonds has played a key role in “luring investors” to buy huge amount of municipal debt. The Fed specifically points out the perception of low default rates is due to widely advertised reports of low default rates by credit rating agencies. But the Fed determined the credit rating agencies have not told the whole story about the level of municipal bond defaults. Moody’s Investors Service (Moody’s) and Standard and Poor’s (S&P), the two largest bond rating agencies, provide annual default statistics for the municipal bonds. S&P reported that its “rated” municipal bonds defaulted only 47 times from 1986 to 2011. Similarly, Moody’s indicates that its “rated” municipal bonds defaulted only 71 times from 1970 to 2011. This compares much more favorably to the record of thousands corporate bond defaults during the same period:

But when the Fed tracked default listings from 1970 to 2011 through the Mergent and S&P Capital IQ data bases available to institutional investors, the municipal default rates during the same periods sky-rocket from 71 to 2,521 for Moody’s and 47 to 2,366 for S&P. The Fed calculated that there were a total of 2,527 municipal bonds that defaulted from the late 1950s through 2011; confirming that the real rate of municipal bond defaults was 36 times higher than Moody’s and S&P reported to the public.

The Fed warns that information regarding municipal bonds tends to be “self-selected”. Issuers stop seeking an annual rating from Moody’s and/or S&P, if their bonds are likely to not receive an “investment grade” rating. The Fed also determined “the municipal market is bifurcated into general obligation (GO) bonds and revenue bonds”. GO bonds carry a full faith and credit pledge of a state or local government, but revenue bonds are backed by a pledge of revenues raised from a specific enterprise, such as an airport, hospital, or school. According to the Fed, over the past sixteen years, 60% to 70% of newly issued municipal bonds were revenue bonds. Many of these projects appear to be politically justified to bankroll crony capitalist “sustainable” investments as industrial development bonds (IDB). IDB financings often involved new technologies or projects with no historical track record:

“the services offered by an alternative energy plant, pollution control facility, or other corporate-like entity may not be considered essential, because of the availability of other energy sources. Thus, these enterprises may have less potential to generate revenue.”

The bottom line of the Fed report is Moody’s and S&P are culpable for understating the risks to investing in the municipal bond market. Within 48 hours of the release of the Fed report, Moody’s acknowledged 10% of California cities have declared fiscal crises and disclosed: “across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two”. Based on the Fed report and Moody’s reaction, California and other municipal bondholders should be panicked.

Chriss Street and Paul Preston Co-Host “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

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”
Streaming Live Monday Through Friday at 7-10 PM
Click Here to Listen:  http://www.mysytv.net/kmyclive.html