California Cities Scramble to Avert Insolvency

Tuesday, March 20, 2012
By Paul Martin

When the city of Stockton, Calif., announced last month it would skip some bond payments and enter talks with its creditors, the municipal debt world shuddered.

If Stockton were to file for bankruptcy protection, it would be the largest U.S. city ever to do so. Other troubled Californian municipalities might be tempted to follow suit. Predictions of mass defaults on municipal bonds might start to look a little more realistic.

But a close look at the municipal finance situation across California suggests mass bankruptcies are unlikely.

Most troubled local governments in the state have taken drastic steps to cut spending, with city managers asserting they have their arms around the problems. A new, state-mandated mediation process may also help municipalities avoid the worst — though it could force bondholders to accept losses outside the bankruptcy process.

The new law, passed after the San Francisco Bay area city of Vallejo filed for bankruptcy in 2008, requires Stockton to try to corral its major bondholders, bond insurers, city employees and retirees into mediation for up to 90 days.

“City negotiators will surely hold the bankruptcy gun to stakeholders’ heads, including employees and their unions and bondholders represented by the insurers,” wrote Alan Schankel, an analyst with Janney Capital Markets, in a recent note.

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