California Goes Bankrupt

One California city after another becomes insolvent as the state's economic crisis worsens.


First Vallejo, then Stockton, then Mammoth Lakes, and now San Bernardino and soon possibly Compton. As Orange County Supervisor John Moorlach told Bloomberg News, the bankruptcy dominoes are starting to fall. One California city after another—following a decade-long spree of ramping up public-employee pay and pension benefits, as well as redevelopment debt—are becoming insolvent.

Not that the state's legislators have anything constructive to offer. California's Democratic leaders are not only unwilling to rein in the costs of benefits for their patrons, the public-sector unions, but they have been erecting roadblocks to those localities that want to fix the problem on their own. Yet all the political blockades in the world cannot fix the basic problem of insolvency.

Stockton negotiated the new process created by a state law requiring a 60-day period of negotiations before filing for Chapter 9 bankruptcy. That period is over and the city—a hard-pressed port on the edge of the California Delta—has become the largest city in the country to pursue municipal bankruptcy. The cause was a pension system eating up 30 percent of the budget, an absurdly generous retiree medical program, and excess bond debt for pension obligations and redevelopment projects.

Soon after, Mammoth Lakes decided to pursue bankruptcy. That city's problem came after it lost a judgment in a development case. Although not tied to public-employee compensation, the situation was caused by city officials who prefer to play developer than tend to the nuts-and-bolts of city government—a long-term problem in that eastern Sierra vacation town. In 1996, Mammoth Lakes lost a court case after it declared its downtown area blighted because of excess urbanization, in a ruling the judge said exemplified the misuse of redevelopment power.

The latest city to declare bankruptcy is San Bernardino, which has declared an emergency situation that will allow it to evade the negotiation period mandated by state law. The city simply doesn't have the cash to keep operating. As Bloomberg reported, "San Bernardino and its agencies have more than $220 million of debt, including $48.6 million of taxable pension-obligation bonds, according to financial statements." Pension-obligation bonds are used by cities to pay ongoing pension expenses, yet San Bernardino's problems show that a city cannot borrow its way out of debt.

Other big cities, including Los Angeles, are talking more openly about the bankruptcy option. Not long ago critics who mentioned the B-word were considered Chicken Littles.

The latest talking point is that these cities couldn't control what happened to them. The Riverside Press-Enterprise reported: "The city of San Bernardino's financial woes are a directly correlation to a torrent of foreclosures in the Inland area of Southern California, the national foreclosure tracking firm RealtyTrac said Thursday. 'Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,' said RealtyTrac vice president Daren Blomquist."

There's no doubt San Bernardino and Stockton—Ground Zero for the housing crisis—suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know—they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals. They squandered the money when it came flowing in, now depict themselves as victims of circumstance when the funds dried up.

The real culprit is foolish decision making. Stockton, for instance, refused to take advantage of an exemption in prevailing wage laws—something that could have saved it money but would have angered the powerful unions.

The housing bubble hit the hardest in cities inland from the growth-controlled major metropolitan areas. When the prices went up in Los Angeles and San Francisco, developers moved inland, where it was easier to get the permits necessary to respond to the demands of the marketplace.

But even coastal cities are struggling. Los Angeles is not a victim of the foreclosure crisis. Pension costs in San Jose—where the housing market has rebounded thanks to a healthy tech-based economy—rose 350 percent in 10 years and now consume 20 percent of the general-fund budget. That city passed pension reform on the November ballot to stop the fiscal bleeding.

In the Prop Zero blog Joe Mathews debunks San Bernardino's allegations that the state is to blame for its fiscal problems: "Local elected officials who complain about a lack of state money have things backwards. The state of California is relatively spare in its spending, compared to national averages. California's local officials are, by contrast, big spenders, at or near the national lead in compensation for local workers, especially law enforcement." Mathews misses a big point—California state government spends its money poorly, but he is right about local government wastrels, who busted the bank on public-safety pay and benefit packages and now are looking to cast blame anywhere they can.

Bankruptcy is not a great option but at least it gives cities a chance to get their house in order and start fresh. Unfortunately, Vallejo and Stockton refused to tackle existing pension debt in their bankruptcy plans. Orange County emerged from bankruptcy in the 1990s in better shape than ever, but as writer Chris Reed explained in Calwatchdog, subsequent boards of supervisors then began spending like crazy on public-sector compensation.

Bankruptcy cannot stop future officials from wasting the taxpayer dollar. But when there's no money, there's nothing left to do. In Scranton, Pa., a judge issued an injunction to stop the mayor's plan to begin paying all city employees minimum wage. But there's no money left to pay any more than that, he said. The city will gladly pay more as soon as it has the cash to pay it.

Only when the money runs out will cities find the necessary solutions. That's perhaps the saddest commentary on the situation in California cities these days.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.

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  1. I’m afraid a California bankruptcy won’t happen, as the federal government will step in. Because we can’t allow stupidity to face consequences anymore.

    1. I really hope you are wrong w.r.t. this. If this door gets kicked down the fast slide into to fiscal hell goes into overdrive. The end result of that will be a dictatorship. Which leads to two questions: first is whether we wind up left wing hell or right wing hell.

      The next one is do we wind up in hell after a civil war that will make the last one look like a ladies high tea, or do we all beat like good sheep, and scamper off to be shorn and castrated.

      1. We’re well on the way to dictatorship regardless.

        But I dearly hope CA is allowed to slip into the ocean – I wanna watch.

        Also, fuck California.

        1. CA needs to be raped, repeatedly. They have lead the way on the “how can I tell you how to live your life front” for years. Sliding into the ocean is too good for them.

        2. You might as well say fuck the battered wife. There are a LOT of us here — including a great many native residents — who actively resist and bitterly resent the socialist/progressive government that has taken over the State during our lifetimes. But more and more people arrive every day to dilute what political strength we retain — and I am NOT talking about illegals from South of the border. I am talking about American communists from NORTH and EAST of the border.

          You know, there are people around the world that say “Fuck the USA.” And many of us here would be quick to draw a distinction between the government and the people. Please draw that same distinction when speaking of California.

      2. I would support Texas secession if I didn’t know that the result would be right wing hell. Fuck the Californians, though.

        1. Fuck all statists. Can’t tell which is worse, but I have my suspicions.

          1. the left wing statists tend to believe they can better spend your money than you can. The right wing statists tend to believe they understand morality better than you do.

            I can ignore moral zealots; much more difficult to tell the tax collector to fuck off. Still, it is the definition of lesser of two evils because there is no good guy evident.

            1. face it, if you can keep your money, what you do in the privacy of your own home, is something you can keep to yourself. If the fuckers own your home, and wire it so tat they can monitor you, it is 1984 redux.

            2. Not so sure I agree with that 100%. The left wing statists also think they understand morality better than you do, as well.

              1. true, but their hang ups involve cigarettes and obesity.

                1. And guns. And porn (the feminists). And politically correct speech. And tithing to Gaia. And…

              2. Bill, true, but it’s not like right statists have done much to limit spending, cronyism, or government intervention in the economy. And while both sides favor adventurism abroad, right statists tend to be more supportive

            3. I think you misread the right wing statists. Most of the Republicans in congress want to spend for the simple reason that steering spending to their campaign contributors (e.g. the military industrial complex).

              Consider two pieces of evidence. Recently less than 30% of the 2010 Tea Party class voted to end corporate welfare on 3 votes: cutting funding for the Export/Import Bank, the EDA, and the Dept. of Energy green “investment” program that gave us Solyndra and other failures.

              Second, if the RINOs in the House really wanted to balance the budget, they could have forced Obama to do it by not holding a vote to raise the debt ceiling. Instead they raised it for a promise of future cuts which they are now trying to avoid.

              The Republicans we have in Congress are mostly statist big spenders.

              Not to discount the social conservatives who want to impose their morality via law. But then there are liberals who want to do the same thing, but from their moral vision of free condoms for high school students, sex ed at 6, taking away the freedom to smoke cigarettes in your own bar, the ability to eat foie gras, etc.

    2. I don’t know…the rest of the US is getting tired of all the nonsense coming out of Sacramento!

      “Whadda you mean we can’t have our overpriced choo choo for the congested Bakersfield to Madera corridor?”

      1. I agree. But there are a shit-ton of votes there, along with a lot of political dollars.

        1. Two words: drones


          1. Terminate Sacramento’s command?

            1. With extreme prejudice

              1. You know, maybe they should put California into receivership, like a university department gone wrong. Another more fiscally sane state could run it for a while.

                1. Indiana or Wisconsin? Hell, if it works out, please do that for us here in IL, while we wait for Mike Madigan to die or retire.

      2. Obstinately insisting on HSR is the fault of the California politicians. But obstinately insisting that the Bakersfield-to-Madera corridor be first is the fault of Uncle Sam. What’s being lost in the shuffle is that huge numbers of people, including many who voted for HSR the first time around, and who want to have a good train system in CA, are against the project as it is currently defined. Brown is pushing ahead, regardless. I guess he wants a legacy, but I’m thinking it will be as the Governor who got two big chances to kill California and finally succeeded the second time (after severely crippling her the first time).

    3. If Obama is re-elected, you can bet your paycheck (if you’re lucky enough to have one) that the federal government will step in once more to bail out California with our money in order to ensure that they keep voting Democratic.

      Mitt Romney, on the other hand, is quite likely to tell California to go pound sand when they come to Washington with hat in hand. “You made your own mess, you clean it up.”

      One can only hope that the American electorate will prove to be smarter in 2012 than they were in 2008.

  2. I’m kind of disappointed that Steven didn’t use a picture of Gov. Brown wearing a Batman costume. Is there actually other news happening today?

  3. what you say that over promising benefits to the unions who control most of the states political structure and spending money that wasn’t real is not the road to prosperity? Dang, well lets just build a 100 Billion + train no one will ride, that will fix everything.

    You get the government you elect. California is reaping what it has sewn. I say this as a 22 year resident who has zero representation in the states political class.

    1. “…lets just build a 100 Billion + train no one will ride,….”

      I was going to suggest a trillion dollar statewide network of conveyers, but instead of standing on them, you could sit on a carousel-style horse, or maybe a unicorn. Now that would fix everything.

      That is my drunk suggestion. Hey, its friday, fuck it.

      1. If you are going to gamble $100B, a better gamble would be something that improves local situations around the State (and by that, I mean local transportation infrastructure, not the financial situations of those who who are politically connected to the boondoggle) even if the glittering HSR itself is never delivered.

        Consider Personal Rapid Transit technology: The system at Heathrow Airport proves that the approach works, can be popular (more popular, at least, than trains or buses), and is financially attractive. So how much PRT would $100B buy? Our latest information on the cost of Heathrow Pods indicates that you can put up a system with stops/stations, rolling stock, and supplementary infrastructure at a rate of $15M per mile of guideway. Also, to put PRT stops every half mile or so in every direction (meaning that nobody is more than about 1/4 mile from a system access point — similar to the distribution of bus-stops), you need a grid of overhead guideway with lanes spaced 1/2 mile apart: six miles of guideway per square mile = $90M. So $100B would purchase around 1100 square miles of pervasive PRT coverage.

        (continued in reply msg)

        1. (continued from above)
          Most towns and cities in California would be well-served by systems that covered no more than 16 square miles. The $100B would be enough money to provide 16 square miles of PRT service each to around 69 city regions.

          PRT can be built incrementally, at the rate of $90M per square mile of pervasive coverage, starting in areas where it is needed most, and spreading out to the rest of the State as it is demanded and can be afforded. Californians would start deriving economic benefit from building PRT — less road congestion, faster and more reliable trip times than current mass transit and often more convenience and less expense than taking a personal car, etc. — long before the whole $100B were spent. When a goodly part of the network were complete, PRTs in various towns could, if the HSR system were pursued, serve as feeder/drainer systems for HSR terminals built in more practical, affordable areas outside of cities. This would help make the HSR system more accessible, as well as more popular and cost-efficient.

          But even if no HSR were ever built, the strategy of building the local PRT systems first would guarantee that public money would be well-spent to deliver permanent transportation value to residents throughout the State. (concluded in reply msg)

          1. As a taxpayer, I don’t want the State to take that $100B from me and my fellows. But if they are bound and determined to do it, as Brown and cronies seem to be, then I demand the money at least be spent intelligently. The economics of PRT so far hint at the real prospect of PRT being self-sufficient through farebox and other revenue from operations (advertising, for example), to the point of being able to repay its construction costs as well. The idea of a “public” transportation infrastructure that doesn’t require continual subsidy from taxpayers is very appealing, and I think our leaders are morally obligated to put in due diligence to determine whether PRT can actually deliver on its economic promise, as well as it has delivered on its promise to solve transportation problems, such as those at Heathrow. If the answer proves to be “yes,” then we’ll have another option for going forward — we need them.

    2. Actually, by the sick logic of distressed assets, it actually does make sense. If you’re close enough to bankruptcy, it makes sense to “put everything on 27”. If the miniscule possiblity of a win comes to fruition (27 or the choo-choo spurs development), you might be able to buy yourself a little more time. If it doesn’t, well, what’s the difference between defaulting on $100 billion and $1 trillion?

    3. I am a 52-year native resident who is also far from adequately represented in the State’s political class. I am wondering how many voters who have been here for more than five years (as voting adults, I mean) are actively re-electing the Bozo class. If I thought that there were tens of millions of stupid, venal people in this State, I might not be able to go on. But if there aren’t, then how is it that the stupid, venal group has prevailed for so long?

  4. Should we replace the famous “Kentucky Fried movie” quote “Take him to…Detroit!” by “Take him to…California!”? 😉

    I guess it won’t be long before we see some hastily made Sacramento/Stockton/San Bernadino tourism videos based on the Cleveland one?

  5. See that makes a wehole lot of sense dude.

  6. When cities file bankruptcy, what happens? If UAW is any precedent, secured bondholders will get really screwed (that is, more screwed than bankruptcy laws allow). Didn’t they get really screwed in Vallejo? Workers with lots of seniority will lose nothing.

    We need a proposition to repeal SB400. It made sense when stocks were doubling during the dot com, and legislators assumed 8% annual returns. Irrational exuberance. But now reality has set in.

    Repealing SB400 is not a violation of contract. No workers complained that they are getting more that earlier promised when SB400 was passed, so things can go the other way too. SB400 is merely a statement of what we can pay given the situation/reality we live in, and it’s not that upbeat (ie. not a boom market) anymore.

  7. No sympathy from me. People get the government they deserve, that is, the one they voted for. The sheeple of Calipornia could have had Meg Whitman, a self made billionaire now involved in saving Hewlett Packard. Instead, they voted for a political hack, toady and parasite named Jerry Brownnose. You bought it, you ate it and it made you sick. Then you repeated the process. Pathetic and not deserving of pity or assistance.

    1. I’ve been feeling this way lately too. Moving my frustrations away from the politicians to the voters that voted for them.

    2. Couldn’t agree more. Californians deserve their fate.

      What’s the definition of insanity? Doing the same thing over and over again with the expectation of different results.

  8. There’s a lot of we Californians not happy with the way things are going but the problem is the fucking assholes who come from any one of the 49 red-headed step children states we’re shackled to come live here and bring their progressive ideas, so really, the problem is the fuckfaces that come from everywhere else. Well the exodus is finally driving the Joads from the Golden State as census numbers indicate so maybe once we’re rid of a few more Hawkeyes, Badgers, Buckeyes, and Hoosiers we can right ourselves. Suck It 98%ers. We’re too big to fail and you’re too small to matter.

    California ?ber Alles

    1. First off, thanks for the Dead Kennedys reference!

      You folks needed to do what we did in NH a long time ago – have bumper stickers that read “Welcome to NH, now go home.” We’re happy to take your tourist dollars, now GTFO.

      Yes a lot of liberal Massholes moved into the state in the 80s and 90s, but we’ve solved it. Between deer and moose season, we have Masshole season, which helps keep the population in check.

    2. I used to live in California and experienced all of the frustrations that you are experiencing.

      But I found a very easy solution:

      I moved to Texas three years ago. 🙂

      Apparently a lot of other people are doing the same thing, which is why California’s tax base is shrinking.

      Socialism. It doesn’t work.

      1. Texas (run by GOp) is doing many things right Danram…. Same as Wisconsin under Gov Walker.

        doing it right.

    3. I concur in part and dissent in part. I do believe that the transplants and transients have politically transformed and economically ruined the State of my birth. But I must sadly admit that the King of the political transformers and economic ruiners, our Governor, is native-born.

  9. California is like a pile of manure that attracts flies and insects. Every community across the heartland of America has rejoiced at the magnet Calipornia drew off their weirdos, crazies, and undesirable human refuse. A true service to the Nation. Now you are stuck with this detritus and mentally ill population. You’d better learn to live with it.

  10. The great thing about socialism is that it must eventually collapse under the weight of its own largesse. Unfortunately, it brings down everything and everyone else around it, even the people who repeatedly warn of its impending destruction.

    The real frustrating thing is that people fail to “connect the dots” as to the reason for the lack of economic growth and opportunity. Instead, they flee to places like California, taking their bankrupt socialist political views with them, turning reliably red states like Arizona and Nevada into blue bastions of further social experimentation and ultimate failure.

    As the song writers wrote, “When will they ever learn?”

    1. Back before we used to talk in terms of political colors (except, maybe, red communists and yellow dogs), California was seen as what we would today call “reliably red.” It had the reputation of being a politically conservative State! The slide to the blue side happened quickly, in the years following Ronald Reagan’s terms as governor, and was fueled by accelerating immigration, not so much from the South, as from the communist/socialist enclaves North and East.

  11. Abdicate and relinquish control to the unions. Make them run the state they tore down.

  12. Obamafornia

  13. Bankruptcy: It’s what inevitably happens when Democrats are left in control for too long.

    It’s also what will eventually happen to our nation unless we’re smart enough to radically change course. I hope we are.

  14. Ask me if I really care about what California has done to itself?

    No, I do not.

    Get rid of all the libs, hand it over to true conservatives, and watch prosperity happen!
    the unions have done this to themselves.

    1. But if you give California over to true libertarians, you’ll get the best of both worlds: prosperity that flows from unfettered innovation, which is in turn nourished by the ideas that come from a live-and-let live tolerance that encourages diversity. We seem to have, more or less, the photographic negative of that right now.

  15. I was among the loud few who were telling my city that they should not use revenues from tax increases during the 90s and early 2000s to grow government; that they should instead practice frugality BEFORE it was necessary, so that rainy-day funds could be established for those inevitable downpours of woe. But politics doesn’t work that way. They apparently must spend every dollar they can get their grubby mitts on, and more, employing people to the limit of financial capacity, only to lay them off when times turn bad.

    Ironically, our State parks Director had to resign, and her 2nd in command was fired, precisely because they accumulated a $50+M surplus fund, refusing to dip into or even REPORT that fund during our multi-year rainy-day circumstances, even while threatening to close many State parks and campaigning for higher fees and taxes to keep targeted parks open. Now, I suspect that there was a great deal of underhandedness in this arrangement, which entitles the officials in question to GTFO, but government should be as lean as possible to get the legitimate jobs of government done, such that a modest rainy-day fund, of the type that is at the center of the current scandal, could tide it over during bad times.

    (continued in reply msg below)

    1. (continued from above)

      Prudence demands that the government establish and maintain rainy-day funds, and use them as necessary to keep government operations stable, never accumulating wealth so vast that it is an irresistible target for political raids, and never growing government so much that a modest cushion fund is insufficient to smooth-out a multi-year downturn.

      Why is sound management of resources so hard for government to get? And why do we keep giving them more and more resources to manage, when they keep showing themselves to be so incompetent at it? It’s a puzzlement.

  16. The plural of “Chicken Little” is “Chickens Little,” not “Chicken Littles.” Other than that, this piece is dead on.

    For decades, California has tried to claim that it was at the leading edge of American society. If the Left in the rest of the country has its way, California may well be right–it will be interesting and instructive to see how things play out.

  17. I hope the CA federal courts don’t muck up Chapter 9 case law. The last thing we need is federal precedent saying cities have to retain unsustainable obligations even after bankruptcy.

  18. The leadership in CA decided it wanted to be Mexihole North, and now they have it.

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  20. “Only when the money runs out will cities find the necessary solutions.”

    That is because modern statist legislators and bureaucratic o overpaid govt workers are drunken teenagers on a spending spree.

    They’ve had plenty of warnings, but now Dad and Mom, the taxpayers, realizing their idealistic children are spoiled, destructive, and hedonistic, and since they refuse to do their homeowrk or chores, it’s time to kick them out of the house.

    Kick them out of office. They can no longer be reasoned with. Let them discover on their own what it takes to earn a living instead of parasite off of others. They will scream and cry and trash the house on their way out, but they might thank you for it later, when they mature.

  21. As a Californian, I am very happy that these cities are going bankrupt. It seems the only way to get the attention of a government(s)that is out of control is to “starve the beast.”
    The starving has begun. The cites and state did not run out of their money, they ran out of ours. Enough is enough.
    Btw, I am a retired public safety worker.

  22. Not that the state’s legislators have anything constructive to offer.

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  23. California could, one supposes always solve it’s pension problems very simply. All that is needed is yet another round of Gun Control Legislation, for obviously enactment of such legislation is the solution to all manner of problems, those known and those yet unknown.

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