Stockton bankruptcy looms over 2015

Stockton bankruptcy looms over 2015

 

stockton wikimediaThe New Year is going to bring increasing difficulties for some California cities because of the 2014 settlement of Stockton’s bankruptcy. The reason: because all cities are linked under California municipal laws, especially for pension costs, borrowing costs are going up across the state.

Involved are what’s called “certificates of participation,” which Investopedia defines as:

“A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur.”

COPs do this by creating a fiction that they are leasing a newly built administration facility, rather than having to borrow to build it.  Investors can participate by purchasing a share of the rental revenues, rather than buy bonds that pay interest.

Contrast these “COP’s” with a general obligation bond that has to be paid back by all taxpayers. A true revenue bond pays back debt by the fees, tolls or ticket prices of a municipal facility, such as a municipal golf course, tollway or stadium.

COPs are one of the ways cash-strapped cities got themselves into fiscal insolvency and sometimes bankruptcy, while also over-promising to pay lucrative pensions to public employees. COPs tap city General Fund expenditures to pay rent. The problem is the General Fund is the same pot of money that pays for pension obligations, retiree health care benefits and salaries of police and fire.

Bubble

As long as the Real Estate Mortgage Bubble of 2003 to 2008 was inflating, there were revenues in the city of Stockton operating budget to meet all its obligations.  Once the bubble popped, there weren’t enough revenues to meet all these obligations.

The only way to induce investors wary of getting repaid on future lease back deals is to offer higher interest rates.

One of the risks in COPs is that cities have the right to divert the rental revenue from investors to make payroll obligations in a cash crunch.

William Bonawitz of PNC Capital Advisors told Bloomberg, “It is not so much the probability of default is any different.  It’s really the severity of loss would differ greatly.” Recoveries to investors ranged from 100 cents on the dollar for lease-back financing of administrative buildings, to less than 15 cents on the dollar for municipal golf-course securities.

Vulnerable

While golf courses generate self-sufficient revenues, they nonetheless are vulnerable to having to pay premium borrowing rates to offset the losses on lease-back financing of city administrative facilities. Moreover, investors are going to want collateral to do any future lease-back deals and that collateral may be a golf course, airport, sewer plant, power plant or toll bridge.

In Stockton’s case, National Public Finance Guarantee Corporation and Assured Guaranty Corporation insured the Stockton debt and settled with creditors.  But that insurance premium is surely going to be much higher next time not only for Stockton, but for all cities in California.

Indeed, Franklin Templeton Fixed Income Group’s Municipal Department announced it no longer will be investing in COPs. Even worse, cities may be at risk of losing a revenue-producing facility in the event of insolvency of an administrative building built by lease-back financing.

Bottom line: Stockton’s bankruptcy may end up with cities not only going bankrupt, but losing their municipal infrastructure.

25 comments

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  1. Libi U
    Libi U 24 December, 2014, 06:51

    ‘…Involved are what’s called “certificates of participation,”

    it means they plan to pay the debt by leasing their property to themselves – which will only send them further down the toilet….

    the reason stockton went bankrupt is because the city acquired massive bond debt without voter approval

    Reply this comment
  2. Ronald Stein
    Ronald Stein 24 December, 2014, 07:08

    The inmates are running the pension costs Asylum. Public sector contracts negotiated by public sector employees that hammer out a contract that forces under duress a third party, taxpayers, to cough up the necessary dough, doesn’t seem too pass the smell test. In fact, it more closely resembles racketeering. Any challenges to that “racket” would be heard before judges who have pension and benefit package they want to protect. Again, seems like a racketeering cover-up right before our public eyes. Fiscal irresponsibility protects the jobs of bureaucrats who use their power in ways that harm those who work for a living.

    Reply this comment
  3. Dork
    Dork 24 December, 2014, 07:55

    Don’t worry, Math has a funny way of fixing all this fraud. And Common Core principles will not make it any better, because Math, just is.

    Reply this comment
  4. bob
    bob 24 December, 2014, 08:03

    How dare you, Wayne. There are no problems with these pensions. Just ask Doglass, he’ll tell ya all about it. But if there are any problems the taxpayers are on the hook, no cuts to pensions. That’s the law so pay up (according to Doglass.)

    And look everybloody are trough feeders are near the top! And these numbers don’t include pensions and health bennies…and why not? Every gooberment worker is a hero, ya know.

    California ranks near top in federal, state, local government pay

    http://www.sacbee.com/news/politics-government/the-state-worker/article4815915.html

    Reply this comment
    • Rex the Wonder Dog!
      Rex the Wonder Dog! 24 December, 2014, 16:58

      Do not pick on Dougie, he is older and may be getting Alzheimer’s, it is not his fault. Dougie has a good heart. Brain, not as good 😉

      Reply this comment
  5. Ulysses Uhaul
    Ulysses Uhaul 24 December, 2014, 08:52

    Let’s come together on pensions. Pensioners are not feeders they are retired human beings who worked many years in public service.

    They are not criminals, dumpster divers, protestors.

    They pay taxes.

    They are neighbors and at little league games and in churches.

    They are responsible good citizens.

    Reply this comment
    • Royce
      Royce 24 December, 2014, 16:19

      These pension plans are not subject to normal public disclosure, while every other plan is subject to full disclosure….consequently they are horribly mismanaged and it will be the public servant who will pay in the end with a reduced income stream.

      Liberalism is killing the middleclass….

      Reply this comment
    • Lehman Bros.
      Lehman Bros. 30 December, 2014, 02:47

      They won’t mind paying a lot more if their entitled kids want to go to college. Tuition at UC is going up 25% to pay for pensions.

      Reply this comment
  6. desmond
    desmond 24 December, 2014, 11:06

    Here’s hoping for that the govt pension rolls are thinned out due to 2015, due to strokes, cancer, organ failures. Happy holidays.

    Reply this comment
  7. Ulysses Uhaul
    Ulysses Uhaul 24 December, 2014, 14:38

    Quite obvious you have deep deep relationship issues in your past. Don’t bring your sick posts to our beloved CWD.

    Have some respect for the site owners who have a stellar reputation!

    Reply this comment
  8. T Mind of your Ted Godhead System
    T Mind of your Ted Godhead System 24 December, 2014, 20:50

    Merry Christmas Doomera! Jesus Christ– the hope of the world! Or whoever you pray to!

    Reply this comment
  9. desmond
    desmond 25 December, 2014, 12:20

    Christmas Day factoid. A 70 year old retired Stockton policeman was victim of a hit and run and died in the last few days. Of course, he was on duty. Get this , they need to retire early because they are cops, but of course he was hired back to help his retirement. Oh, son is a cop in Stockton, and his daughter used to be a police dispatcher. There must be something in the genes that they were superior to other candidates. Last but not least, they are white. No wonder people are passed at cops. Too much nepotism, too many white cops, and of course Stockton is bankrupt, and not just financially.

    Reply this comment
  10. Ulysses Uhaul
    Ulysses Uhaul 25 December, 2014, 21:26

    Your gone soon!

    Reply this comment
  11. desmond
    desmond 26 December, 2014, 04:17

    Oh, I have strong feelings that an unemployed African-American veteran of Iraq should have been given a part time police job in Stockton, rather than a 70 year old retired cop, who is a member of the White boy’s club. No wonder people are pissed. Nepotism in the government is as despicable as cronyism in business.

    Reply this comment
  12. NTHEOC
    NTHEOC 26 December, 2014, 14:16

    Hey Desmond, was 7 eleven open on Christmas Day? I imagine you needed to go get your big gulp and bag of Cheetos. Hah!

    Reply this comment
  13. desmond
    desmond 26 December, 2014, 16:12

    To believe that is ok to be a 70 year old retired cop and still working the street is crazy talk. To be upset that an unemployed African American veteran should not be given the chance to do that part time work is narrow minded at best. I let the your comments stand on their own.

    Reply this comment
  14. desmond
    desmond 26 December, 2014, 16:16

    To believe that is ok to be a 70 year old retired cop and still working the street is crazy talk. To oppose an unemployed African American veteran be given the chance to do that part time work is narrow minded at best. I let the your comments stand on their own.

    Reply this comment
    • NTHEOC
      NTHEOC 26 December, 2014, 17:48

      Obviously Stockton does not want to pay or does not have the funds to hire and put out a test,interview,background checks, medical, and psych on a pool of candidates. Yes Desmond, they would have to put out a job flyer for all, and all this cost way more money than just to keep on a part time retiree that already knows the job. also Desmond, you have to be a patrol officer for a certain amount of years before you can be an investigator! You know nothing Desmond.

      Reply this comment
  15. desmond
    desmond 26 December, 2014, 18:20

    Sales tax increase passed in 2013 for increased police. I let the chain of comments you and others post speak for themselves. They paint a picture of why people are protesting beautifully.

    Reply this comment
  16. desmond
    desmond 29 December, 2014, 17:54

    Nice banter among the racists.

    Reply this comment
  17. Lehman Bros.
    Lehman Bros. 30 December, 2014, 03:00

    When they say taxpayers are responsible for generous pensions–that doesn’t mean that taxes are going up. It means lawmakers will divert taxpayer money away from schools and fixing bridges to pensions. In Ill. 20,000 teachers may be fired after the courts rejected pension reform. In Pittsburgh they aren’t even thinking about repairing bridges that could fall any minute (see the “60 Minutes” piece).

    Reply this comment

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