February 29, 2012

Stockton California - Another Harbinger of Doom

The real culprit.
Stockton California is a harbinger of more problems to come, perhaps even DOOM. In a state that is notorious for it's overspending, cities are not immune from the threat of bankruptcy, but that isn't even the real problem.

The city of Stockton is seeking a form of bankruptcy protection, and that's the real concern.
Feb 28 (Reuters) - Stockton, California's city council approved a plan late on Tuesday night for the city to skip some bond payments in an effort to restructure its precarious finances and avoid becoming the biggest U.S. city to file for bankruptcy.

Along with defaulting on about $2 million of debt payments through the end of its current fiscal year, the city located about 85 miles east of San Francisco will seek mediation with its major bond holders to try to get a break on its debt to help tackle a budget gap projected to range from $20 million to $38 million.

A state law approved after Vallejo, California's 2008 bankruptcy requires negotiations in front of a mediator that could last up to 90 days with creditors, bond insurers, public employee unions and retired government employees before a local government can file for bankruptcy.
(emphasis added)

The real concern is that in a state that cannot control its spending, laws are being passed to make it easier to avoid bankruptcy.  What is the next step in this line of thinking?  Can the state government require that the mediator make terms unduly favorable to the cities who require mediation?  Can the state force the creditors to accept increasingly unfavorable terms just so cities can continue to borrow beyond their means?  It's not a likely next step in the legislative direction but the rules do indicate future movement in that direction.  Contrast the approach with the austerity measures being imposed on spendthrift Greece.  In Greece there's a bailout in exchange for the required changes in the operating model for the nation.  California seems to be looking for a different, painless way to solve it's problems but there are no painless solutions to overspending.  Ultimately the overspending has to stop, and many will find that painful.

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