More CA cities should declare bankruptcy

March 8, 2013

By John Seiler

Last year, three California cities declared bankruptcy: Stockton, San Bernardino and Mammoth Lakes. Atwater nearly did. Mammoth Lakes lost a lawsuit.

But for the other cities — as well as for the Vallejo bankruptcy in 2008 — what the cities basically are saying is: “Previous city councils were bought and paid for by the public-employee unions. Those councils ripped off the taxpayer by giving wildly excessive pay, perks and pensions to city employees. We can’t afford that anymore, so we’re declaring bankruptcy. Let a federal bankruptcy court sort it out. Then we can start over.”

Peter Schiff is one of the country’s top financial gurus. His Euro Pacific Capital has an office in Newport Beach. He’s best known for predicting the 2008 financial collapse. Here’s his reasoning on why cities should declare bankruptcy:

“Stockton is like a Greece here in California. I mean, Stockton, the government there made a lot of promises to its government employees. And, when the real estate boom was going, there was plenty of revenue coming in, and they promised the moon to voters and to employees, big pensions, health care benefits. And then the bottom dropped out. You’ve got 20 percent unemployment now in Stockton. They don’t have the tax base. They can’t afford all these commitments. And what are they doing? They’re telling their bondholders, we can’t pay. You’ve got all the municipal bonds outstanding. I mean, this is going to be a major problem for those bondholders and now government workers.

“But Stockton is not going to be the last city to declare bankruptcy, not by a long shot. And I think it’s going to go up the food chain. We’re going to have state governments that are going to face these problems. We’re going to have the federal government face this problem, especially when interest rates go up….

“If interest rates go up, or rather ‘when’ interest rates go up, the debt becomes unserviceable. And the minute it becomes unserviceable, the minute our creditors worry that we can’t service the debt, then they actually want their principle back. Then it’s not about just the interest; it’s about coming up with the principle. Where are we going to get that?…

“But, you know, it is going to be problematic for a lot of people who have based their lives on assumptions of a revenue stream coming in from a government entity. And so it’s going to be very painful for the people involved. And it’s also going to be painful to people who loaned money to the city of Stockton, who hold those bonds, who thought they were going to get certain interest payments and they were going to get their principle returned. They’re going to wake up to the reality that Stockton can’t pay. So when we do have the restructuring that we need, there is going to be pain. We just have to be able to suck it up and bear that pain.

“And, of course, for some people, it’ll be relief because, you know, otherwise, in order to keep their promises, we have to increase taxes. And if you already have 20 percent of the city unemployed, how are you going to increase taxes on the few people that are still working, and will they stay in town to pay those taxes or will they leave, particularly the employers? So we have to do this.”