Analysis Essay on 2012 Bankruptcies in Stockton and San Bernardino County, California

Published: 2021-07-02 17:01:37
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A series of municipal bankruptcies in the U.S. after the 2007-2008 financial crisis revealed that it is essential to recognize the various factors that state and city fiscal operations and solvency conditions. The factors that drove the city to bankruptcy include a huge property bubble. In essence, according to California Common Sense, a think tank in the city, between 2000 and 2006, the median home prices rose by 200% (cited in Barro, 2012). In effect, this flooded the citys coffers with property tax revenues, with officials signing employee contracts that were unaffordable. The workers got a pay rise of 7% in the strong, but even when the revenues declined, thy still got a pay rise of 2.5%. In addition, Stockton also had a huge property burst, but the median home price fell by a whopping 70% between 2006 and 2009. It is illegal in California to raise property tax rates whenever the values fall. According to the think tank California Common Sense, in 2007 the city issued a $125 million in pension obligation bonds to fix problems with the bonds, and this backfired on Stockton as assets the city bought with the bond proceeds unfortunately reduced in value. The city, therefore, was stuck with a liability of pension and bonds. According to Common Sense California, this was the major drivers of the citys insolvency. Besides, Stockton also gave firefighters retirement benefits that sought to fully cover for health care, which according to Bob Deis, the city manager, is a Ponzi scheme that lefty the city with a $417 million liability (cited in Christie, 2012). Besides, Deis made it clear that about the real estate burst, "most of the assets that look nice are under water," and thus, it subsequently led to the insolvency (cited in Christie, 2012).

On the other hand, San Bernardino also filed for bankruptcy in 2012 citing for over a billion dollars in debts, making it the third city in California to file for insolvency. According to the United States Bankruptcy Court, Central California District, the city has more than $1 billion in liabilities and has between 10,000 and 25,000 creditors. The city attorney said in a report that officials had falsified budgetary reports top the mayor and the council for around 13 of the 16 years preceding the insolvency, which subsequently hid the scale of the debt the city was in. Also, the bankruptcy was contributed by illegal criminal activities in the city departments. For instance, the County sheriff department alleged that related to allegations of possible criminal activity within departments of the San Bernardino city government was in the process before the announcement of the insolvency (cited in Reid (2012). In addition, as Michael Sweet, who is a bankruptcy attorney working with the Fox Rothschild, the non-payment of the debt, and the lack of interest of the city in engaging in talks with its pension bondholders weeks before presenting an exit plan for the bankruptcy was a sure thing of disorganization in the city departments. For this reason, this was a contributing factor for the citys insolvency. As such, the bankruptcy troubles emanated from governance failures in managing the citys finances, as well as the lack of an initiative to look at the economic landscape (Gillette & Skeel, 2016). Besides, Dick Larkin, who is the director of credit analysis at muni bond broker-dealer HJ Sims, the city is still facing the possibility of insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth, and increases in pension and debt costs. These are some of the factors that contributed to the bankruptcy.

References

Barro, J. (2012). Why Stockton, California, Is Bankrupt, And Your Town Isnt. Retrieved from http://www.huffingtonpost.com/2012/06/28/stockton-bankruptcy-california-_n_1633647.html

Christie, J. (2012). How Stockton went broke: A 15-year spending binge. Retrieved from http://www.reuters.com/article/us-stockton-bankruptcy-cause-idUSBRE8621DL20120703

CNBC. (2015). San Bernardino has defaulted on $10 million in bond payments. Retrieved from http://www.cnbc.com/2015/03/18/san-bernardino-has-defaulted-on-10-million-in-bond-payments.html

Gillette, C. P., & Skeel, D. A. (2016). Governance Reform and the Judicial Role in Municipal Bankruptcy. Yale Law Journal, 125(5):1150-1237

Reid, T. (2012). San Bernardino, California, files for bankruptcy with over $1 billion in debts. Retrieved http://www.cnbc.com/2015/03/18/san-bernardino-has-defaulted-on-10-million-in-bond-payments.html

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