California’s Insolvencies Mounting as Atwater Declares Emergency

Thursday, 04 Oct 2012 01:02 PM

 

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Atwater, California, the Merced County agricultural community facing insolvency before year-end, declared a fiscal emergency as it struggles to avoid becoming the state’s fourth city to seek bankruptcy protection in 2012.

The city of 28,000, located among dairies and almond groves about 100 miles (160 kilometers) southeast of San Francisco, declared the emergency Wednesday as a $3.3 million deficit may leave it out of cash before year-end, according to budget documents. Officials, who want concessions from public-employee unions, told almost a quarter of municipal employees they’ll lose their jobs as Atwater tries to balance its budget.

Stockton, San Bernardino and Mammoth Lakes have all gone into bankruptcy court since June. Across California, the world’s ninth-biggest economy, foreclosures and fallout from the worst recession since the 1930s have depleted property-tax revenue while municipalities are burdened with rising costs.

“This is the saddest day in my history of service to the city of Atwater,” Mayor Joan Faul said of the job losses. “But honestly, if we had not made the cuts we would not have been able to make payroll.”

Under a new state law, cities seeking bankruptcy protection must first declare a fiscal emergency or hold mediation talks with creditors. Municipalities can file for court protection if mediation doesn’t bring a resolution in 60 days or if the city runs out of money and declares a fiscal emergency.

Bypassing Mediation

To do so, the city must first invoke the law, known as AB506, to bypass the mediation with a fiscal emergency declaration. The council has twice postponed making a decision on invoking the legislation as it negotiates with labor unions. It may consider the move Oct. 22.

While the city dickers with unions, employees are getting notifications that they are being let go. Jennifer Trindade, a single mother who said she’s been an administrative assistant for the city manager’s office and council for five years, told Fresno television station KFSN that Oct. 29 would be her last day at work.

“Right now, I’m going home and stressing,” she told the station.

David Kotok, chief investment officer at Cumberland Advisors, called the recent rash of California bankruptcies a disease.

‘Wholesale Warnings’

“In California, we have a disease, and the disease is spreading,” Kotok, who helps manage about $2.1 billion as chief investment officer of Sarasota, Florida-based Cumberland, said yesterday at the State & Municipal Finance Conference hosted by Bloomberg Link in New York.

“I suspect we’re going to see wholesale warnings and downgrades” among issuers in the state, he said.

California cities may face “across-the-board rating revisions” because of the state’s volatile real-estate economy and “hands-off” policy on local finances, Moody’s Investors Service said in August.

State officials have succeeded “in taking as much revenue as possible from local governments,” including eliminating redevelopment agencies, Miguel Santana, chief administrative officer for Los Angeles, said at the Bloomberg Link conference. “For most cities in the state, we’ve been forced to fend for ourselves. And unlike the state, we really have no cushion.”

Since World War II, Atwater’s economy revolved around agriculture and nearby Castle Air Force Base, the home of B-52 bombers. Castle closed in 1995 after the end of the Cold War, taking thousands of jobs with it.

Below Average

Atwater’s median household income in 2010 was $42,226, 19 percent below the national average of $51,914. Almost a fourth of the population is considered below the poverty line, compared with 13.7 percent statewide, according to U.S. Census figures.

The housing crash cut Atwater’s median home price by more than half, to $140,000 in the fiscal year that ended in June from $336,000 in 2007. Unemployment surged to 21 percent, helping send the city’s tax revenue plummeting more than one- fifth since 2007.

At the same time, Atwater’s pension and retirement costs are rising. Its contribution rate to the California Public Employees’ Retirement System rose after the fund suffered a record loss of 23.4 percent in 2009.

Under labor contracts, the city pays all of an employee’s 8 percent mandatory contribution for pension costs and 7 percentage points of the 9 percent for police and firefighters. Healthcare premiums for workers increased 15 percent in 2011 and are forecast to jump 10 percent next year.

© Copyright 2014 Bloomberg News. All rights reserved.

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