Being a national of the United Kingdom, a lot of the articles popping up on Bloomberg or CNBC seem both foreign and a little irrelevant to me (what is NFL anyway?). This one caught my eye however.
The city of Stockton in California has filed for bankrupty and defaulted on over $10m in debt payments. Over the past few years there has been a trickle of articles citing the US municipal bond market and local US government as the next thing to succumb to the strains of a debt-fuelled lifestyle.
Is Stockton a lone scenario or a 'Bear Stearns hedge fund' type event? Would a collapse in credit-worthiness of US municipalities even be a big issue?
Stockton, California, said it will file for bankruptcy after talks with bondholders and labor unions failed, making the agricultural center the biggest U.S. city to seek court protection from creditors.
http://www.bloomberg.com/news/2012-06-27/stockton-california-to-file-fo…
Well, this is actually somewhat common throughout California. I can't speak for the rest of the country, but California's budget process is a special kind of dysfunctional.
California has high property prices, but low property taxes due to Prop 13. Said taxes were fixed at 1%, and cannot increase faster than inflation (2% per year?). So, the state has turned to other sources. Its liberal leanings make anything regressive politically impossible, so the legislature has instead gone with a very high, very progressive income tax. I think it is 9.3% for the top bracket, with increases expected. I should note, the sales tax is still over 8%.
The state balances its budget around the peak of boom cycles. Unfortunately, the top earners have highly volatile incomes, so the state runs a massive deficit in recessions. CA also has some of the most generous social programs in the country, the utilization of which increases with economic decline.
California's employees also enjoy the benefits of unions, and nearly untouchable benefits. Oftentimes, you see union benefit bargaining wars. (If the teachers get a pay bump, the firefighters want one too.) Legal precedent has made their pensions almost untouchable, even as the entity in question is driven to the brink of bankruptcy. Tricks such as pension "spiking" do not help.
This is all compounded by the budgeting system. The state legislature requires a 2/3 majority to raise taxes or pass a budget. Yet voters can put new programs into law with a simple majority...yea, you can see how this goes. California's have used this power to regulate the size of chicken coops, among other pressing issues.
All this has left the state in a precarious fiscal position. Stockton always sat on the edge; it only existed due to the housing boom. Nobody wants to live in Stockton; it's in the middle of nowhere and has a bit of a meth problem. People lived there because other areas were too expensive. When property values fell, people started defaulting on their (underwater) mortgages and walking away. Soon, they could not support the bloated public sector pensions.
California recently ended "redevelopment agencies", which basically served as a means of distributing property tax funds to municipalities instead of the state. Now municipalities are facing a funding gap, having come to rely on the redevelopment agencies. For instance, the 49ers were supposed to move to Santa Clara...but the city is coming up $30 million short for their new stadium. Some cities that received significant redevelopment funds, like San Jose, are now on the brink.
OP, this was an absolutely fantastic response and I wish to agree with it 100%. Cali is significantly different from other states but the city/state funding crises are felt all over the country.
NICK DIAZ: "DON'T BE SCARED HOMIE" "STOCKTON MOTHERF****R!!!!!!!"
The most plausible end game is some hurt for creditors, massive hurt for pensioners, a little hurt for taxpayers.
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