California in the Brink of Bankruptcy Due to Rising Costs

Fresno, CA — The Golden State has lately been not so golden. With the slow moving economy  and the rising costs, California is in the brink of declaring bankruptcy for the entire state, if that is even possible. If that happens, it will be the very first state in the U.S. to succumb to a financial crisis. During Governor Schwarzenegger’s term, the state declared a fiscal emergency. The closest by far to almost declaring bankruptcy.

California in the Brink of Bankruptcy Due to Rising Costs| thomas hogan law officeAs of to date, San Bernardino has been the third California city to succumb to insolvency. Stockton suffered the worst fate having their new City Hall repossessed by creditors because of inability to pay their debt. Mammoth Lakes declared Chapter 9 reorganization to avoid a judgment by the court. There are other cities that are hanging on by a thread about to be engulfed by fiscal collapse.

Compton could be next in line with their volatile finances and the accusations of fraud. Compton mayor, Eric Perrodin has already requested the State Controller’s Office to conduct a forensic audit into the matter. The financial crisis has forced a lot of cities to slash services and workforce but the real scare is that some California cities may end up being dissolved because of bankruptcy.

Bankruptcy is like a wildfire threatening to burn the state of California. The ripple effect is already beginning. Aside from the aforementioned cities, Oakland borrowed a $211 million taxable bond just to cover pension expenses.

One of the biggest problems that cities face is the rising cost of pension liabilities and because of this California cities are forced to make ends meet. In the case of San Bernardino, the cost of their obligation to their employee retirement system blew up to twice the amount for the current year from the original $1 million in the 2006-07 fiscal year. Moody’s Investors Service, one of the big 3 credit rating companies, has tacked that the data for unfunded pension liabilities has reached to $2.2 trillion, an amount three times larger than it was 3 years ago.

According to University of California-Irvine business professor, Peter Navarro, he opined that due to recent events municipalities who are financially in dire straits will one by one seek the protection of bankruptcy. He stated, “This is not the end. This is the beginning.” He further added, “As cities see it can be done and is being done, it will give them an idea to do it.”

Vallejo was the first California city to declare bankruptcy. And the road to recovery was a very painful one for Vallejo. Vallejo Mayor Osby Davis now looks back and ponders if the road they had taken was worth the cost of what they had to go through when the city declared for bankruptcy. The San Francisco Bay Area municipality had to shut down 2 fire stations and when it comes to fixing road infrastructure, the city can only fix 10% since it is unable to shoulder the costs. Their police force and firefighters were slashed by 50% and the remaining 50% are overworked to perform the tasks of 2 or more people.

With the recent wave of bankruptcy filings and some more expected in the days to come, people are are considering on taking cuts just to keep their municipalities afloat. In these troubled times, tightening one’s belt is a necessity and no longer an option.

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