Time for an Update on Municipal Bankruptcy
It’s time for an update on municipal bankruptcy. As you know, San Bernardino, CA as well as Mammoth Lakes and Stockton filed for bankruptcy protection in recent weeks. Moodys investor service does analysis of various parties to determine whether they are credit worthy. Investors rely on that analysis to determine whether they wish to give loans to those entities, and that includes municipalities. Cities borrow money in the way of bonds from investors for such things as parks and bridges, streets and jails, all kinds of things.
If they are going to borrow money and if they are less credit worthy, they pay higher interest. That is their concern. So, Moodys has gone around, having seen what happened in those three cities that I mentioned to determine whether there are other cities that are at risk. They want to be able to publish reports so that investors can choose whether they will lend money and at what rates. The city of San Jose is one city that has had to deal with that. They were probably approached by somebody in the press and answered some questions. Of course, some things are evident. There was a vote not long ago in which the citizens of San Jose voted overwhelmingly to reduce or cut the pensions of their employees.
I am sure that was a painful thing for the public employees. They also closed libraries and reduced their police force and various things like that. When Moodys sees those kinds of things going on, it’s a good thing on one hand because the city is taking action, but the problem is there is a certain perception by lenders and whether that means the lenders are now wary of lending money to that entity. And if they are, it reduces the likelihood they are going to give a loan, and if they do give a loan they charge higher interest. So those are the kinds of things that cities are struggling with right now in California. Not all states allow their cities to file bankruptcy. But California does so things are tough in California as they are in many places. I will be keeping an eye on that because it is a very important development as it affects a lot of real people in California.