Third California city in two weeks declares bankruptcy

posted at 10:41 am on July 11, 2012 by Ed Morrissey

In yet another in our series of posts on what the hell is wrong with my native state, San Bernardino voted yesterday to declare bankruptcy — the third city in California in the past two weeks to do so.   The city of 209,000 was about to renege on its payroll, but as the LA Times reports, the city has been lying to its residents about its budgets for years:

City Atty. James Penman said city budget officials had falsified documents presented to the mayor and council for 13 of the last 16 years, masking the city’s deficit spending.

“For the last 16 years the budget prepared for the council showed the city was in the black,” Penman said, not naming those allegedly responsible. “The mayor and the council were not given accurate documents.”

[Mayor Patrick] Morris was taken aback by the comments, saying this was the first time he has heard of the allegations.

Er, isn’t it the job of the mayor and city council to have those financial statements verified?  The city knew enough to demand concessions and workforce reductions from the public-employee unions the last four years, so they clearly had some inkling that their fiscal position wasn’t exactly solid.  Even if Morris and the rest of the council really knew nothing about the city’s financial woes, that’s still a damning indictment of incompetence.

Now they’re in a $46 million hole with no way to meet payroll.  Their only option now is bankruptcy protection, which will allow them to ignore some creditors while paying their employees, but that’s going to be a very tough solution.  Their municipal bond rating will plummet, making their borrowing costs shoot through the roof.  The bankruptcy might also allow them to impose new concessions on the PEUs, but that won’t come without a lot of agitation from the unions, which will complicate their ability to right the financial ship.

Nevertheless, this is starting to look like a trend for one of the trendiest states in the nation:

Officials in Stockton said their June decision to seek federal bankruptcy protection was the “only choice” for the city that was unable to reach finance agreements with creditors to address a $26 million budget shortfall.

On July 4, Mammoth Lakes sought bankruptcy protection from a $43 million court judgment, according to Bloomberg News.

In the six decades since Congress created bankruptcy protection for cities, fewer than 500 municipal bankruptcy petitions have been filed, according to the United States Courts website.

Decades of financial mismanagement has led the Golden State to the brink of financial collapse — and not just the cities.  The state has run annual budget deficits for years that run in the $15-25 billion range; their latest is an $18 billion gap.  At the same time, the California Senate just approved the construction of a completely unnecessary high-speed rail line between two points in California where no one wants to go, as a first step to building a full line between San Francisco and Los Angeles that will carry passengers at a rate roughly two and a half times slower than air travel.  The cost? $100 billion, at the moment.  Furthermore, it will run on electricity, which California already doesn’t produce in enough quantity to meet its current needs.

Don’t expect bankruptcy to be limited to San Bernardino, Stockton, and Mammoth Lakes.  The whole state will soon sink into fiscal oblivion if they keep making decisions like this, turning what should be a Nirvana into a financial Chernobyl.

On that same note, let’s take a look at a video Bill Whittle produced last month just before the spate of bankruptcies began about what ails California higher education.  I’ll give you a hint — it’s pretty much the same kind of decision-making that ails California in general.

Update: The second sentence should have read “third city,” not “third state.”  I’ve fixed it above; thanks to reader Gillian for the correction.


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