Wednesday, May 7, 2008

Vallejo, California Votes for Bankruptcy

Expect this to be the first of many [Apr 25: Shoes Beginning to Fall in the States]... unlike the federal government, local/state cannot print money out of thin air to address shortfalls. We've discussed countless times this will be the "lag effect" outcome... while everyone assures us everything is fine - these are the type of shoes we'll be seeing down the road. I was discussing this last December [Dec 13: A Web of Credit Snares Another: Cleveland]...

One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

But don't worry, as "they" assure us... housing is only 4.5% of GDP... nothing to worry about. Governments spend out the wazoo - don't save for a rainy day - and now their tax receipts are going to fall through the floor since their budgets were set on "bubble" incomes based off real estate of 2005-2006. But keep buying stocks... it's all good. Unless you live in Vallejo, CA (which looks to be a good sized San Fran suburb of moderate middle income - median wages in upper $40s, lower $50s) What I've been amazed to watch locally is how local governments (in a 1 state recession we've had for about 4 years now) won't cut jobs or benefits (for themselves) while private enterprise is cutting jobs, benefits, wages left and right. I guess they will hold on - until they go BK. But we need to either see very sizeable tax increases and/or job cuts/services lost to pay for our excesses of the housing bubble. Expect governments to tread water this year and then a lot of filings in 2009. Or wait, maybe they can go to the Federal Government for handouts/bailouts - no wait, that's only for those with lobbyist firms.

That's for cities; a few states are in dire straights already [Dec 16: California in a State of Fiscal Emergency - Coming to a Theater Near You]

Again, if you live in Texas, Oklahoma, Iowa, or Wyoming, ignore this... this will be a great dichotomy of regional recession... sharp in some areas, moderate in others, and boom times in export/agriculture/energy areas. If you live in those states, send your thank you's to Dubai, New Dehli, and Shanghai.
  • Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.
  • The city council's unanimous decision makes the San Francisco suburb the largest city in California to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.
  • The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.
  • ``Nobody wants bankruptcy but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''
  • City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions. (it's just a necessity - welcome to the pooring of America, labor unions - we cannot afford you anymore; come sink with those unlucky souls in the private sector)
  • The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. U.S. state sales-tax collections fell in the first quarter for the first time in six years
  • California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year
  • Police and firefighting salaries, pension and overtime consume almost 80 percent of Vallejo's $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.
  • Home prices in Solano County, where the town resides, dropped 19 percent in January from the year before - so what happens to all these cities states with the same drop? [Apr 29: Housing Stocks Continue to Ignore the News]
Stay tuned... as with most of the real economic impact we are just beginning the recession, not about to come out of it (remember the folks calling for the end of a recession or no recession at all are the same ones who were saying "subprime is contained")

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