In February of 2012, California Governor Jerry Brown, a Democrat, declared to me at a National Governors Association meeting in Washington that California was not having bankruptcy problems and that he had not ceded too much to the California teachers’ unions.
Similarly employing President Obama’s ‘blame the last guy in office’ technique, Brown pointed to former Republican Governor Arnold Shwarzenegger for the fiscal crisis California finds itself in, but he made no mention of the state’s Democratic led legislature. Both chambers have been in Democratic hands since 1970, except during the 1995-1996 year, when the Assembly was led by Republicans.
“I reduced the deficit that was left to me by a Republican governor from 26 billion to 9 billion. I have a plan to reduce it to zero. I’m working on it,” said Brown.
When I asked if California was having bankruptcy issues he said, “No, that’s not true. We’re going far. We’re doing quite well.”
Brown’s spokesman Gil Duran interrupted asking, “How about asking a question that’s based on truth?”
Brown went on to say, “The economy is doing better. It’s coming back. The private economy had a $90 billion…and that then feeds into the public sector as well. There are deficits, because there have been excesses for the last decade brought on principally by the mortgage bubble and breakdown. And we’re now cleaning up after that mess, but it does take a while to do that and I’d say we’re on a very positive course, but it’s not as rapid as I would like, but the trajectory is all in the right direction.”
Duran proclaimed I was “lying” about California having bankruptcy problems at this point.
“You need to check your facts. You’re saying that California is going bankrupt. S&P just upgraded California to positive…what’s insulting is your lack of your grip on the facts,” he said. “No, you’re totally wrong. You can check your facts. You’re not telling the truth. You’re saying California is going bankrupt. California was just upgraded to positive by S & P. That’s not bankruptcy. It’s just not true.”
Six months later, California became the home of three cities: San Bernadino, Mammoth Lakes, and Stockton that are filing for bankruptcy. The S&P cautioned that it could very well reverse the positive rating it gave to California in February if the budget that Brown recently signed is not solid in the eyes of Standard and Poors. It should be noted even after that upgrade in February, California still has the lowest S&P credit rating of all 50 states.
(*UPDATE 7/19/12: Reuters is now reporting that the city of Compton may declare bankruptcy by September)
In fact, the Sacramento Bee reported that a Pew study found that California has had the worse credit rating record in the entire country for past 11 years and highest rating California achieved during that period was amid Shwarzenegger’s administration. The lowest rating occurred in 2003 during the state’s budget crisis and Gov. Gray Davis’s term:
California has the worst credit rating of any state now and the nation’s worst credit rating record over the past 11 years, according to a new nationwide compilation by the Pew Center on the States.
The compilation is based on Standard and Poor’s credit ratings and covers every year since 2001. Thirteen states sit atop the Pew chart with AAA credit ratings while California is alone at the bottom at A-minus and is the only state to dip to the worst possible rating, BBB, during the 11-year period.
That happened in 2003, during a state budget crisis so severe that then-Gov. Gray Davis was recalled. The highest rating California achieved during the period, A-plus, came in 2006.
Additionally, Brown’s budget relies on tax hikes, which must be approved by the voters of California in November. If voters reject the tax initiative, Brown has threatened cuts to the California public school system.
While some argue three bankrupt cities do not make a trend, SFGate.com reports at least eight more California cities are seeing fiscal problems:(bolding is mine)
An additional eight California cities, including Fairfield, which declared a fiscal emergency in April, have officially notified the municipal bond market this year that they are facing significant financial hardship, according to Matt Fabian, managing director of Municipal Market Advisors, which conducts independent research on the municipal bond industry.
The notifications don’t necessarily mean these cities are headed for bankruptcy court, but they do signal real adversity.
Along with Fairfield, the other cities include Arvin (Kern County), El Monte (Los Angeles County), Grover Beach (San Luis Obispo County), Lancaster (Los Angeles County), Monrovia (Los Angeles County), Riverbank (Stanislaus County) and Tehachapi (Kern County). “I think people in our market are certainly getting more concerned,” Fabian said. “San Bernardino came out of nowhere, which makes you worry that there are others in a similar situation that you don’t know about.”
In Fairfield, officials said the city is not in danger of declaring bankruptcy but that it faces a deficit of almost $8 million in the 2013-14 fiscal year, which they said is because of the state swiping local dollars for its budget and the elimination of redevelopment agencies. David White, director of finance and assistant city manager for Fairfield, said that after years of cutting back on services, the declaration of a fiscal emergency was necessary to place a sales tax increase on the November ballot.
SFGate also points out the bankrupt cities’ of San Bernadino and Stockton share common traits with other cities that have gone bankrupt in the past:(bolding is mine)
Those include cities with tax revenue severely affected by the mortgage crisis, cities that are older and have a significant amount of deferred maintenance, and cities that are unable to persuade public employee unions to agree to deep cuts in salaries and benefits.
McKenzie said he does not think the recent spate of bankruptcy actions makes other cities see it as a less stigmatized and more palatable action. He pointed to Vallejo, which entered bankruptcy in 2008 and emerged in 2011 with fewer firefighters, police officers and public services. Officials there have cautioned that bankruptcy is a last-resort solution that’s not only about numbers, but also about people and their jobs, quality of life and morale.
“Everybody remembers Vallejo. Everybody remembers sometimes the medicine is worse than the disease,” he said.