California City Declares Fiscal Emergency as Insolvency Looms

Thursday, 04 Oct 2012 06:30 AM

 

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Atwater, California, declared a fiscal emergency and told almost a quarter of its city employees they will lose their jobs as it seeks to avoid becoming the state’s fourth city to seek bankruptcy protection.

The town of 28,000, situated among Merced County’s dairies and almond groves about 100 miles (160 kilometers) southeast of San Francisco, has a $3.3 million deficit that may leave it insolvent before year-end, according to budget documents. Atwater officials said they will seek concessions from public- employee unions and try to raise fees for some services and sell others to balance the budget and avoid bankruptcy.

Stockton, San Bernardino and Mammoth Lakes all have gone into bankruptcy court since June. Across the state, the recession and the foreclosure crisis have depleted property-tax revenue even as municipalities are burdened with rising costs.

“This is the saddest day in my history of service to the city of Atwater,” Atwater Mayor Joan Faul said of the loss of jobs. “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.

To do so, the city must first invoke the new law known as AB506 in order to bypass the mediation with a fiscal emergency declaration, something Atwater hasn’t yet done. The council has twice postponed making a decision while it negotiates with labor unions and may consider the move Oct. 22.

‘Disease Spreading’

David Kotok, chief investment officer at Cumberland Advisors, called the recent rash of bankruptcies in California a disease. Kotok helps manage about $2.1 billion as chief investment officer of Sarasota, Florida-based Cumberland.

“In California, we have a disease, and the disease is spreading,” Kotok said today 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.

Moody’s Investors Service said in August that 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.

The Atwater’s economy since World War II 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.

Housing Crash

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.

Atwater’s pension and retirement costs also are on the rise. 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. Health-care premiums for workers increased 15 percent in 2011 and are forecast to jump 10 percent next year.


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