Another California Bankruptcy – More to Come?

Reuters has the news:

A resort town in California warned on Tuesday that it will run out of money by March due to burdensome salary and pension costs and could join other U.S. cities that have recently filed for bankruptcy protection.

A bankruptcy filing by Desert Hot Springs, a city of 26,000 about 110 miles east of Los Angeles, would make it the third California city along with San Bernardino and Stockton to seek court protection from creditors.

San Bernardino and Detroit – the biggest U.S. city to seek Chapter 9 protection – are likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.

The problems in Desert Hot Springs came to light last week when a new finance director reviewed the city’s records and discovered a $3 million shortfall in its budget of $13.5 million. Amy Aguer, the interim director of finance, did not have details on how the shortfall occurred but said it was the result of higher-than-expected pension and salary costs, especially in the police department, and overly optimistic estimates of revenue.

How many other towns and cities in California have looming “higher-than-expected pension and salary costs.”  There maybe hundreds, if not thousands.

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About Russ Steele

Freelance writer and climate change blogger. Russ spent twenty years in the Air Force as a navigator specializing in electronics warfare and digital systems. After his service he was employed for sixteen years as concept developer for TRW, an aerospace and automotive company, and then was CEO of a non-profit Internet provider for 18 months. Russ's articles have appeared in Comstock's Business, Capitol Journal, Trailer Life, Monitoring Times, and Idaho Magazine.
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5 Responses to Another California Bankruptcy – More to Come?

  1. Russ Steele says:

    DESERT HOT SPRINGS, CALIF. — This financially troubled city declared a fiscal emergency Tuesday in an effort to avert a second federal bankruptcy filing.

    The City Council voted unanimously to declare the emergency as the city grapples with a $6 million gap between revenues and spending.

    Interim City Manager Bob Adams has said declaring a fiscal emergency would enable the city to negotiate with contractors and labor groups to cut expenses.

    If no action is taken, the city of 27,000 people near Palm Springs will run out of money by March, officials said.

    The city previously filed for bankruptcy in 2001 after a legal judgment.

    Read more here: http://www.fresnobee.com/2013/11/19/3618946/calif-city-plans-vote-on-fiscal.html#storylink=cpy

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    • Dai Meagher, CPA says:

      Interesting information. Part of the Netherlands answer is that “the Dutch pension system is nearly 100% funded.” Here in the USA, most pension systems are dependent upon an unrealistic and perpetual 7.5% to 7.75% growth rate in the equities market to fill the gulf that exists between the percent pensions ARE funded (e.g. 30%) and the percent pensions SHOULD be funded (e.g. 100%).

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  2. Sean says:

    Two things have conspired to ease California’s budget woes. One is that the stock market has doubled since 2009 so a lot of high earner income taxes have materialized. The higher taxes on millionaires is also helping out but it creating an even greater dependency on the super wealthy. What happens when the quantitative easing tapers in a significant way (possibly as early as next year) or even ends? It’s likely a double hit will occur from a drop in stock prices (so less revenue for millionaires) and the cost of all that debt that’s piled up over the last 10 years will skyrocket. Mr. Maddoff proved (along with many other examples) that nefarious dealings are not fleshed out in the good times but in the bad.

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    • Dai Meagher, CPA says:

      Agreed. Most pension systems are excessively dependent upon an unrealistically rosy future.

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