Thread: Will Stockton Be the Biggest Municipal Bankruptcy Ever?

Will Stockton Be the Biggest Municipal Bankruptcy Ever?

By JASON MOTLAGH / STOCKTON | Time.com – 15 hrs ago

At half past five on a weekday afternoon, the Rose Barbershop is the only downtown business open for blocks in Stockton, Calif. Don Nagai used to give haircuts late into the night, but now "it's a ghost town," he says, putting the finishing touches on his last customer. "Same thing during the day; it's too dangerous for people to hang around," shrugs William Koga, 53, a longtime patron who said there had been two shootings over the past week near his corner grocery store. With crime surging and an undermanned police force struggling to keep up, both men were cynical about the city they've always called home. "But," adds the 84-year-old Nagai, with a touch of gallows humor, "that Forbes [magazine] is full of s--- -- Stockton is maybe the second worst place to live."

In recent years this inland port city of nearly 300,000 people has earned several distinctions, none of them good. Twice atop Forbes' list of America's Most Miserable Cities ... Second highest violent-crime rate in California ... Second highest home-foreclosure rate of all major U.S. metro areas. Now, Stockton is on the verge of another dubious benchmark: bankruptcy. In its third straight year of fiscal emergency, the city faces a deficit of as high as $38 million on its $165 million general fund budget. As required by state law, the city council is in mediation with creditors and unions. If a deal is not reached in the coming weeks -- and prospects are bleak -- Stockton will become the largest municipality in U.S. history to go bust.

While Stockton has been down on its luck for as long as memory serves, many residents insist its fiscal crisis is a function of bad management during the flush years of the housing boom. Long an agricultural hub for Central Valley farms and situated about 80 miles (130 km) east of San Francisco, it went through a steady financial decline that saw its once thriving downtown hollowed out by poverty and crime. Scores of people decamped for the north of the city, or left altogether. Street gangs multiplied. Then, in the early 2000s, the housing boom drew developers back to the region in droves. Plush subdivisions went up overnight to attract families with easy credit who could not afford the Bay Area.

Prior to the housing boom, reckless spending on public-employee contracts put the city's long-term health at risk, according to active city officials. As coffers started to fill up from the swelling tax base, the sweetheart deals got sweeter. If an employee worked for one month, for instance, they and their spouses were eligible for retiree health care for life, a policy that had the predictable effect of moving people to quit working early. Today Stockton has 94 retirees with pensions of at least $100,000 a year, Reuters reported, amounting to twice the number of California towns its size. The city's long-term health liabilities alone amount to more than $400 million.

Meanwhile, Stockton's urban core was given a face-lift to seduce homeowners. Tens of millions of dollars were poured into building a marquee waterfront area comparable to San Antonio's river walk, complete with a gleaming sports arena, theater complex, marina and walkway. A celebrity chef was invited to run a restaurant, rent free, on the first floor of the historic Stockton Hotel. When it came time to open, the city paid singer Neil Diamond $1 million to headline a kickoff concert. "Then," says longtime resident Robert Weaver, 76, "the whole thing ground to a standstill."

(MORE: A Crappy Wall Street Deal Produces Nation's Largest Ever Municipal Bankruptcy, Finally)


The housing bubble burst, followed by the Great Recession. City revenue streams dried up (plunging more than $50 million compared with prerecession years), slashing municipal services across the board, from public parking to bike police. The downtown quickly reverted to a no-man's-land: waterfront entertainments were shuttered, the grand hotels given over to low-income and student housing. A fancy high-rise municipal complex that officials had paid $35 million for is now being rented out, leaving the city council to debate its woes in their old building, where a red, white and blue banner out front reads with fitting irony: "Stockton: An All America City."

"Stockton did something very similar to what many American families did: the city overcommitted to long-term obligations that even under the best of times the city could not afford," says Bob Deis, the city manager since mid-2010. "So if there was not a recession, the city would have been having the conversation we're having in four or five years. But then the perfect storm happened."

For decades, Stockton has had some of the state's highest crime rates, and the loss of over a quarter of the police force -- not to mention less pay and benefits to those who remain -- has taken a grim toll. Last year there were 58 homicides in the city, an all-time high, according to police-department figures, and more than double the total for 2008, when the humming economy corresponded to the lowest level of violence in 30 years. The city is on track to surpass that record this year with 12 murders so far, including four in a three-day stretch. On Wednesday, an officer was shot by a teen (he survived). "We're doing our best with what we have, but it's violent out there," says Joe Silva, a police-department spokesman.

Extra resources will not come easily. The value of area homes has fallen 75% over the past six years, with some economists forecasting that it could take another 20 for housing markets to return to their boom-day levels. What's more, with unemployment locked above 16%, the tax base is diminished and homeless shelters are overbooked. "There's nothing anymore in Stockton," says Nicole Trout-Lacy, 33, who spent a year job hunting before being forced out of her apartment with her three children. They now live in the Stockton Shelter for the Homeless, sleeping on the floor because of a lack of beds. "If not for this place, we'd all be living in the tent city outside."

Given the city's huge obligations and shrinking capacity to generate revenue, Deis says it's critical for Stockton to "break itself from the boom-and-bust cycle." With guidance from a team of urban-development experts from around the country, city leaders are pursuing a new plan to revitalize the downtown -- this time with private money. "We're investing a huge amount of resources to make this process work", says Deis, praising the tenacity of the current city council in going after bloated labor contracts to find some fiscal breathing space. "But we're not in control of it," he adds.

Despite all the gloom and doom, some Stocktonians are taking the long view. Alphonso Maynard, 47, vividly recalls the height of the 1980s' crack epidemic. Standing in front of a Starbucks near the waterfront, he swears that "it used to be much, much worse here," pointing to a onetime flophouse that has been converted into an office building, then a drug-dealers' park that is now a school. "This city still has real potential if the right funds and motivation are in place. I think it'll bounce back again." In the shadow of the vacant sports arena where he works part-time, a young couple strolled by the river hand in hand. Perhaps they were glad to be all alone.


Will Stockton Be the Biggest Municipal Bankruptcy Ever? - Yahoo! News

Guest Post: Snapback - Stockton, Calif. And All The Cities To Follow


Submitted by Tyler Durden on 07/06/2012 10:28 -0400
Submitted by Charles Hugh Smith from Of Two Minds

Snapback: Stockton, Calif. and All the Cities to Follow

Government promises to public employees have created "zero-risk" Wonderlands protected from the market forces of risk and consequence. These islands of privilege are snapping back to join the real economy.
Every government entity that reckoned it was moated from the market economy will be snapped back to "discover" risk and consequence. Let's lay out the dynamic:

1. Every government can only spend what its economy generates in surplus.

2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.

3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.

4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.

5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.

6. The Federal government and the Federal Reserve have pursued a policy of inflating serial speculative credit-based bubbles.

7. These bubbles inflated assets, profits and taxes, creating the illusion that blow-off speculative tops were "the new normal."

8. Speculative credit-based bubbles misallocate capital and incentivize malinvestment on a spectacular scale.

9. Once the bubble deflates, the capital is lost or trapped in illiquid malinvestments.

10. As a direct result of the dot-com bubble, Stockton's tax revenues (general fund) leaped to $139 million in 2001. As a direct consequence of the housing bubble, it jumped to $186 million in 2007.

11. This "new normal" encouraged the belief that the stock market would double or triple every decade into the future, generating 8%+ annual returns for public union employee pension funds.

12. The city government granted employees open-ended guarantees of lifetime healthcare coverage.

13. This meant that there was no limit on the cost of each employee's benefits.

14. As noted here many times, healthcare costs rise by 7%-10% every year, even as the economy which supports healthcare grows by 2% on average.

15. Healthcare alone will bankrupt the nation, and the bankruptcy of entities that promised open-ended healthcare is merely one manifestation of the coming bankruptcy of the entire sickcare/entitlement Status Quo.

16. Once the stock market reverts to the mean and is revalued to the "new normal" of global recession and low earnings growth, it will decline by 40% or more and yields will remain around 2%.

17. Pension funds earning 2% at best based on expectations of permanent 8% returns cannot sustainably pay the benefits promised.

18. If the city attempts to make up the shortfall annually, the services provided to the citizenry will be gutted. The risk and consequence of malinvestment and favoritism has been offloaded onto the citizens while those protected by the government moat live "risk-free" lives of guaranteed pensions and benefits.

19. The public-employee pension and healthcare benefits were separated from the market economy with this government guarantee: regardless of what happens in the real economy, you will be paid pensions and benefits that have zero exposure to the market economy and private-sector pensions/benefits.

20. In effect, the government has placed its employees and vested interests in a moated "risk-free" zone outside the market economy. The risk that is distributed to all participants in an open market (i.e. a democracy) is transferred to the citizens and taxpayers.

21. Any government that siphons off an increasing share of its taxpayers' disposable income (to distribute to the privileged few) in return for declining services will eventually be overthrown by the citizenry and taxpayers who must bear the full consequences of the city's mismanagement of their capital and income.

22. Every city, county and state in the U.S. which has secured a risk-free wonderland for its favored few will "snap back" into the real economy and face the discipline of the credit market and the "discovery" of price and value.

23. Risk cannot be eliminated by government mandate, it can only be transferred to others. No government entity can maintain a "risk-free" fortress outside the market forever. The moat around Wonderland will be drained or filled, regardless of what promises were made.

24. Government has no mechanism to transparently price risk, value and return on investment. The market will "discover" all these and re-set government services and salaries accordingly.

Guest Post: Snapback - Stockton, Calif. And All The Cities To Follow | ZeroHedge

The Next Imminent Bailout: Eminent Domain


Submitted by Tyler Durden on 07/05/2012 15:33 -0400

• Borrowing Costs
• PIMCO
• Securities Industry and Financial Markets Association
• Wall Street Journal

It seems that governmental efforts to save the underwater and ineligible homeowner from his own fate are reaching fever pitch. Not only do we hear today of the up to $300mm in Agriculture Department Rural Housing Service loans that may have financed ineligible projects or borrowers with a high potential inability to repay the loans; but yesterday's WSJ reports on the growing call for 'eminent-domain' powers to be used by local government officials in California to stop the "housing bust's public blight on their city". In yet another get-out-of-jail-free card, the officials (helped by a friendly local hedge-fund / mortgage-provider) want to use the government's ability to forcibly acquire property to remove underwater homes, restructure the mortgage (cut principal), and hand back the home to the previously unable to pay dilemma-ridden homeowner.

Following last week's bankruptcy in Stockton, it seems cities are increasingly desperate as they reel from the effects of the housing bust - willing instead to use government funds (provided by the working and mortgage-paying taxpayer) to bailout the underwater (and likely not paying anything at all) homeowner. As PIMCO's Scott Simon puts it: "I don't see how you could find it anything other than appalling", as this would crush property prices further and drive up borrowing costs. As we noted earlier, until these mal-investments are marked to market, there will be no useful growth in our credit-bound economy but transferring wealth to the 'mal'-investor seems like a terrible idea.

The percentage of underwater borrowers remains staggering...




But fraudulently 'giving' these homeowners money is not the way to go:-

Heritage: Ineligible Borrowers Got Hundreds Of Millions In Stimulus Home Loans

The Agriculture Department’s Rural Housing Service likely loaned hundreds of millions of dollars to ineligible borrowers as part of President Obama’s stimulus package, a report by federal watchdogs has revealed.

The stimulus earmarked more than $1 billion for RHS home loans in rural communities. According to the Ag Department’s Inspector General, up to $292.3 million of those loans may have financed ineligible projects, or gone to borrowers that did not meet the loan program’s requirements due to their potential inability to repay the loans.
...

Rural Development field-level personnel made these questionable determinations because they were not sufficiently trained on how to either conduct or adequately document proper determinations; did not have an effective second party review process in place to catch errors; and did not have sufficient guidance on the characteristics and requirements needed for a property to become eligible. Rural Development conducted a follow-up review of the questionable loans and agreed that they were not fully processed in accordance with regulations or handbook requirements.

And 'giving' them principal writedowns seems to just be rewarding the mal-investor once again...

Wall Street Journal: Cities Consider Seizing Mortgages

A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth.

Investors holding the current mortgages predict the move will backfire by driving up borrowing costs and further depress property values. "I don't see how you could find it anything other than appalling," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.

Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.

But instead of tearing down property...

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.

...

The seizure of home-mortgage liens, but not the underlying homes, hasn't ever been conducted through eminent domain, as far as the group's principals can tell. And while they believe they have a strong legal case, they expect loan owners to sue.

"California legal precedent and political posture favor the program and constitute an ideal proving ground," Mortgage Resolution Partners said in a presentation to investors reviewed by The Wall Street Journal.

The document said it would begin with a $5 billion effort in California that could grow to three million mortgages as part of a $500 billion multistate effort.

...

A letter sent last week to city leaders from 18 trade associations, led by the Securities Industry and Financial Markets Association, warned that such a move "could actually serve to further depress housing values" by making banks less willing to lend. The plan's backers are unfazed.

The Next Imminent Bailout: Eminent Domain | ZeroHedge