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California cities continue to take a number in the bankruptcy line, similar to Baskin-Robbins. Chapter 9 bankruptcy seems to be in fashion. The small agricultural city Atwater voted to declare a “fiscal emergency” last week which starts the BK process rolling. [1]

California Controller John Chiang singled out four small cities that are in trouble: [2]

“We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said yesterday at a conference in San Francisco. “We need the state to participate in trying to prevent these bankruptcies.”

Chiang pointed to recent financial distress in Jurupa Valley, Wildomar, Eastvale and Menifee in Riverside County.

Compton is also reportedly “out of money” and close to a fiscal emergency. [3]

It still appears that Stockton will set the precedents for the other cities with three questions:

1) Muni bond holders have challenged if Stockton is eligible for BK. The main point is that the city did NOT attempt to reduce its pension payments to Calpers, but DID make all other creditors take a haircut. A hearing is set for January.

2) Can Stockton reduce the principal it owes to Calpers? No hearing set.

3) Can Stockton reduce the principal it owes bond holders? Stockton has proposed this in the plan that was submitted to the court. [4] No hearing set.

If the judge rules that Stockton in NOT eligible for BK, the case might be over in January 2013. Otherwise, my expectation is that it drags on for years mainly as a pension versus bond holders smack down.

One common theme I keep seeing in many places is how bond holders are described. Vilified might be a better word. Typical comments are: [5]

And city creditors are world-class bellyachers. They surprised the city by fighting its eligibility for Chapter 9 (Stockton is not in bankruptcy. Stockton has filed for bankruptcy).

Wells Fargo, two bond insurers, and an investment firm contend that Stockton's bankruptcy filing is unfair because it doesn't cut into employee pensions.

A hearing is scheduled for January.

Consider the way these buzzards act. They refused to negotiate a debt reduction deal in the AB 506 pre-bankruptcy negotiations. They are fighting Stockton's bankruptcy eligibility.

Making it reasonable to assume that once Stockton is in Chapter 9 they will quarrel over every dollar. They are already dragging out Stockton's misery.

The vilification seems based on the fact that large banks are trustees for some of the bonds. Instead of literally thousands of small investors having to fight the case, Wells Fargo, for example will represent all of the owners and lead the fight. It is a lot easier to target Wells Fargo as being an evil bank instead of Mr./Mrs. small muni bond holder. Individual investors own ~ 75% of muni bonds either directly or through funds.

BOTTOM LINE is that California muni debt under the state level should be avoided IMO. While I have detailed several smaller cities that are on the cusp of BK, Los Angeles is widely being discussed as a BK candidate in the future. I am less worried about state level bonds. I have not detailed it, but Governor Brown re-allocated hundreds of millions $’s from city “redevelopment agencies” to the state. Good for the state, bad for the localities.



[1] Atwater, California declares fiscal emergency

[2] California Controller John Chiang on muni bankruptcy

[3] Is Compton headed to Bankruptcy?

[4] Stockton bankruptcy plan

[5] Stockton bond holders are “buzzards”
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