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Thursday, July 12, 2012

California Dreaming is Becoming a Reality

I knew I had read it on this blog first, before I had started posting here. Yep, my partner and founder of this blog, way back in December of 2010 was citing Meredith Whitney's forecast that we could witness 100 municipal bankruptcies in 2011. No we didn't see 100 in 2011 only one, Harrisburg, Pennsylvania, attempted to file for bankruptcy but eventually the court ruled that it could manage its financial mess without asking the bondholders to take a haircut. Whitney was not wrong; just early.
In the last three weeks three California cities, Stockton, San Bernardino, and tiny Mammoth Lake has announced that they will file for bankruptcy. A fourth city in Pennsylvania, Scranton, boyhood home of Vice President Daffy Biden has cut all city worker's pay back to the minimum wage with no overtime allowed. Detroit and Yonkers, New York are on death watch. I doubt if any readers of this blog loaded up on CalMuni's in that most readers of this blog don't need tax free interest income but the potential fallout of multiple cities going belly up just prior to an election is not going to be good for the party of big government. Yes, Cassandra Meredith Whitney is all wet. Just ask Governor Jerry Brown and the sophisticated investors who bought San Bernardino bonds would richer today if they had listened to Glen Beck instead of their brokers.
The plight of the aforementioned cities has not gone much beyond the business pages as was the case with Lehman Brothers but if in the months between now and election more cities follow the blue state model into insolvency it will be a big issue. Moody's, the villains who were damned for not calling the housing bubble and who will probably be damned for pointing out the impending collapse of many US cities estimates that the 40,000 cities, towns, counties and townships across the country have an accumulated unfunded liability, mostly pensions, of $3.9 trillion. The fact that most budget busting public pension schemes will be found in blue states will not be lost on the voters. Nor will the notion that public debts must be paid often sooner rather than later. We could be seeing the crisis of 2008 all over again.

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