Weighing A Strip Club Tax While Municipalities Hit the Wall

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Wolf Richter   www.testosteronepit.com

While all eyes are on Europe, California is hobbling along its own path to, well, a tsunami of last-minute bills. In total, 665 bills are scheduled to be debated by policy committees from Monday through Thursday, the final days for 2012 legislation to get off the ground. California has some issues—its fiscal and economic policies haven't been a raging success recently. Hence, numerous crucial proposals in that pile of bills. For example, a strip club tax.

The bill (AB2441) is a response to the state’s perma-struggle with its budget deficit. To fix that problem once and for all, Assemblyman Das Williams (D-Santa Barbara) came up with a tax of $10 per customer at "sexually-oriented businesses" that serve alcohol (those that serve only soda are exempt), based on the theory, as he explained, that "there is a clear nexus between alcohol consumption and violence against women." But like so many taxes in California, it won’t reduce the budget deficit. Instead, the money would be channeled into a fund for treating victims of sexual assault. To pass, the bill would need a two-thirds supermajority, and Republicans will probably sink that baby.

So it goes in California. But things are getting complicated. In trying to trim its budget, the state has reduced funding programs for municipalities. Now they're teetering. They're already getting hit by rapidly declining property tax revenues, which lag the decline in real estate values by up to three years. In the Bay Area, according to data from DQNews, the median home value in March was $358,000, down 43% from the October 2007 peak of $631,000. In Contra Costa County, one of the tougher places for home owners in the Bay Area, the decline was 53.5%. Even if real estate values were to rise, property taxes based on assessed values would continue to fall due to the lag. And push is coming to shove.

Stockton, a hard-hit city in the Central Valley, is already contemplating bankruptcy. But instead of being able to seek Chapter 9 bankruptcy protection in federal court, it has been forced into mediation by a law Governor Jerry Brown signed last October, following the 2008 bankruptcy of Vallejo, just a ferry-ride from San Francisco. The law specifies that a troubled municipality will have to have its finances vivisected by a neutral evaluator, though it can still seek bankruptcy protection afterwards. A compromise. Unions, concerned that their members might lose some of their benefits in bankruptcy court, had pushed to give evaluators the power to prevent municipalities from seeking bankruptcy protection. To avoid this process, a municipality has to show that it would be insolvent in 60 days or that its fiscal emergency would “jeopardizes the health, safety, or well-being of the residents.”

"There’s a misconception on the part of the cities that they should have unfettered access to Chapter 9,” explained Assemblyman Bob Wieckowski (D-Fremont). Perhaps legislators had seen a slo-mo wave of municipal bankruptcies. Thus, Stockton is stuck in mediation purgatory, likely through June. If it is able to file for bankruptcy, which will give it an opportunity to negotiate away some of its debts in federal court, it will be the largest American city to do so.

Stockton’s litany of culprits range from free healthcare for retired city employees to revenue bonds on projects that don't produce enough revenues. But there is one item not on the list of culprits, the New York Times reported: underfunded pensions. To the tune of $30 million a year. Apparently due to pressure from Calpers (California Public Employees' Retirement System), the largest public pension fund in the US; it maintains that pensions are untouchable obligations under state law.

For Calpers, the prospect of a California city in Federal Bankruptcy Court portends a potential test of the constitutional mandate that federal law trumps state laws—in particular, the state laws that protect public workers’ pensions in California. Such a challenge could blow a hole in what experts consider the most airtight pension protections anywhere.

Stockton's predecessor, Orange County, went bankrupt in 1994, the largest municipal bankruptcy in US history. Alas, once again, Orange County is taking enormous financial risks to paper over its gapping budget deficit. This time, it quietly entered into $518 million of illiquid and unsecured interest rate wagers mostly financed from payroll and savings accounts of local schools and other government agencies—like the Titanic that ignored warnings and steamed full-speed into the night. Read.... Orange County’s Iceberg Dead Ahead.