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Stockton, CA Next Muni Default Domino To File

Tyler Durden's picture




 

Following the inevitable transition of Harrisburg, PA into bankruptcy once the realization that the can can no longer be kicked down the road, it now appears that even the formerly "safe" Jefferson County, which was expected to avoid default, may itself devolve into a Chapter 9 (Jefferson County Democratic Lawmakers May Derail Debt Deal) following another political SNAFU. So while we wait on whether another $3.1 billion in muni debt will go toward the ultimate validation of M-Dub's thesis (if not calendar of events), the next city already prepping to go down the tubes is long-troubled epicenter of the credit bubble: Stockton, CA. Bloomberg reports, "Stockton, California, which declared a fiscal emergency in May, warned it may default on redevelopment agency debt issued in 2006, citing a shortfall in tax-increment revenue. Debt service will exceed available revenue by about $858,000 in the North Stockton project area, according to an Oct. 12 filing with the SEC." As expected, just like in any other house of cards, once the first one goes, the next ones down realize that those who default first (or among the first) default best, as there will be no money left for the stragglers. Expect to see many more cities biting the bullet and making a mockery of all those who in turn mocked the bearish muni thesis.

More:

Standard & Poor’s downgraded the underlying rating on series 2006A and 2006B revenue bonds issued by the Stockton Public Financing Authority on behalf of the Stockton Redevelopment Agency to B from BB with a negative outlook in an Oct. 4 report, citing declines in assessed valuation for real estate in the redevelopment area. The redevelopment agency said it expects a 3.17 percent drop in values for fiscal 2012. “The city has experienced persistent negative economic effects of housing market stress and the recent recession in our view, but the declines in some economic indicators appear to be moderating,’’ the report said. The city, an agricultural center about 80 miles east of San Francisco, will reduce the shortfall with a $137,249 North Stockton cash surplus held by the trustee from reserve fund interest earnings and money released from a reduced reserve requirement after a 2010 bond-repurchase program, Stockton said in the filing.

Needless to say it will be ironic if the great muni scare strikes twice at just the same time it did back in 2010.  Only this time, there will be one year less of can kicking available to insolvent municipalities.

 

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Mon, 10/24/2011 - 08:50 | 1803855 mayhem_korner
mayhem_korner's picture

Harrisburg - POP!

Stockton - POP!

It's like the first few kernels of a jumbo Redenbacher bag in the microwave.  :D

Mon, 10/24/2011 - 08:56 | 1803880 HelluvaEngineer
HelluvaEngineer's picture

Harrisburg was "fixed" by the Governor.  Same will happen here.

Mon, 10/24/2011 - 09:00 | 1803893 mayhem_korner
mayhem_korner's picture

 

 

"Fixed" is the new statist term for wealth transfer.

Mon, 10/24/2011 - 09:14 | 1803937 TruthInSunshine
TruthInSunshine's picture

15 years ago, the U.S. had Steve Jobs, Johnny Cash & Bob Hope.

Today, the U.S. (and the EU) have no jobs, cash or hope, bitchez.

Mon, 10/24/2011 - 11:39 | 1804509 William Murderface
William Murderface's picture

Kevin Bacon, please don't die.

Mon, 10/24/2011 - 12:04 | 1804625 MachoMan
MachoMan's picture

It was clever the first time...  and I wouldn't say it's being beaten to death yet...  but, please stop saying it.

Mon, 10/24/2011 - 13:28 | 1804983 anony
anony's picture

It would be best if your advice is ignored as many may not have seen it the first time around.

There is no way I can read all the material here and on other blogs. There isn't enough time in a month to get through even one web site's post and comments.

It's still clever, I haven't seen it before, and if it appears again, I'll just presume that someone else gets to see it for the first time.

No harm, no.....

 

Mon, 10/24/2011 - 13:50 | 1805086 mayhem_korner
mayhem_korner's picture

 

 

Are you curled up in a basement somewhere waiting for the The Wizard of Oz to come out on VHS?

Mon, 10/24/2011 - 09:28 | 1803988 Carlyle Groupie
Carlyle Groupie's picture

"It's like the first few kernels of a jumbo Redenbacher bag in the microwave."

LOL. I liked that.

Hey guess what kids. This is one situation you will never see in China.

'merika muni's; time to chew on that poison pill. Ask Meridith, she'll tell ya!

Thanks! From China. Peace be with you.

Mon, 10/24/2011 - 08:52 | 1803862 brew
brew's picture

tiimmmmbbbrrrr...

Mon, 10/24/2011 - 08:56 | 1803865 lolmao500
lolmao500's picture

It's all bullish. Look :

U.S. municipal defaults fell in the last quarter to 12, totaling $126 million, from 18 a year earlier and 24 in the same period of 2009, according to the Distressed Debt Securities Newsletter.

 

Any date for the default being official?

Mon, 10/24/2011 - 08:53 | 1803870 malikai
malikai's picture

We're in for quite the comedic juggling act here. Munis, Europe, BAC, etc. It will make for some good television, but the sore asshole part we're all going to feel sorta turns me off to the fun.

Mon, 10/24/2011 - 08:53 | 1803871 Saxxon
Saxxon's picture

Right up the road from my fair burg.

Tax revenues are one buboe they cannot hide.

No position.

Mon, 10/24/2011 - 08:53 | 1803872 buzzsaw99
buzzsaw99's picture

Were I the Jefferson County authorities I would pay only a token amount.

Mon, 10/24/2011 - 08:59 | 1803876 dwdollar
dwdollar's picture

Norman, Oklahoma had a 10-15 million dollar deficit planned for next year. The general fund has about 25-30 million left in it. I imagine this is the typical story all across this country. Time is running out... Major cuts will have to be made for 2013.

Mon, 10/24/2011 - 09:04 | 1803913 buzzsaw99
buzzsaw99's picture

no link you stink

Mon, 10/24/2011 - 09:09 | 1803922 dwdollar
dwdollar's picture

About the only news that covers it is the OU paper from time to time. You can look at here though...

http://www.ci.norman.ok.us/finance/budget-services

Mon, 10/24/2011 - 09:18 | 1803936 buzzsaw99
buzzsaw99's picture

i guess you meant for me to read through the 2013 budget pdf. :yawn:

 

the city of norman has money coming out its butt. they projected a shortfall last year then found a million bucks they didn't even know they had. right now they are arguing how to fund a new animal shelter, with the $3M extra bux in the safety fund, or pass another bond measure. it goes for a vote soon. if there were any municipal bond i would be willing to hold through this depression would be ou or the city of norman. the only problem they have is wanting to spend like a drunken californicator.

http://normantranscript.com/x205313273/City-budget-subject-to-many-factors

Mon, 10/24/2011 - 09:21 | 1803965 dwdollar
dwdollar's picture

I agree, IF the education bubble holds. They'll be able to raise taxes to whatever in order to survive.

Mon, 10/24/2011 - 09:26 | 1803981 buzzsaw99
buzzsaw99's picture

ain't it the truth? they want to tax themselves to death around here. i swear we are being run by big city liberals.

Mon, 10/24/2011 - 09:32 | 1804007 dwdollar
Mon, 10/24/2011 - 09:36 | 1804018 buzzsaw99
buzzsaw99's picture

that would make a good halloween mask.

Mon, 10/24/2011 - 10:34 | 1804192 tarsubil
tarsubil's picture

What a profile. Public management consultant, political science professor, policy analyst, all kinds of feel good boards and councils, and to top it all off a methodist named rosenthal. They didn't mention if she was a ginger and a jersoyian too.

Mon, 10/24/2011 - 09:24 | 1803975 Manthong
Manthong's picture

Maybe the animal shelter in Norman can help feed the folks in Stockton and Harrisburg.

Mon, 10/24/2011 - 09:27 | 1803989 TruthInSunshine
TruthInSunshine's picture

Stockton just needs some 'animal spirits,' and everything will turn around for them.

/sarc

Mon, 10/24/2011 - 09:28 | 1803990 buzzsaw99
buzzsaw99's picture

they'd just get mange and end up in the incinerator.

Mon, 10/24/2011 - 15:22 | 1805482 BooMushroom
BooMushroom's picture

The article says Stockton is a farming kind of place.  It's not.  It's a city, with a large minority population.  The kids have never seen a pig or a chicken or a rabbit, and even wouldn't know that they were for food.  The idea of a Dad getting up in the morning and going to work every morning is as foreign to them as sitting around all day and getting paid to drink and smoke is to us.

Mon, 10/24/2011 - 08:56 | 1803878 Sequitur
Sequitur's picture

Match inching closer to the fuse . . . .

Mon, 10/24/2011 - 09:22 | 1803968 WonderDawg
WonderDawg's picture

The fuse has been lit, the only question is how long is the fuse?

Mon, 10/24/2011 - 08:57 | 1803884 PulauHantu29
PulauHantu29's picture

<<

On Sunday October 23, 2011, 2:20 pm EDT

Anyone whose interest has been piqued by Occupy Wall Street and similar protests, here’s another reason to support their cause.

On Wednesday, the government released data from 2010 paychecks . This includes numbers from payroll taxes that have been reported to the Social Security Administration. They paint a disturbing picture.

The data showed that in 2010, there were fewer jobs and they paid less. One exception is people making more than $1 million annually. This increased by 20 percent from 2009.>>

http://finance.yahoo.com/news/Millionaires-Going-Different-wscheats-3198...

It goes to the soaring inequality we are seeing worldwide.

Mon, 10/24/2011 - 09:18 | 1803955 LawsofPhysics
LawsofPhysics's picture

None of this is sustainable so why worry, just hedge accordingly.

Mon, 10/24/2011 - 08:59 | 1803891 mayhem_korner
mayhem_korner's picture

 

 

A colleague of mine argues adamantly that municipalities cannot default because "state law says so."  I think she is infested with logic antibodies...

Mon, 10/24/2011 - 09:11 | 1803930 ZackAttack
ZackAttack's picture

Well, there's a partial truth in there. Not all, but a number of state constitutions require taxes to be raised if necessary to pay GO bond coupons.

Mon, 10/24/2011 - 09:23 | 1803970 mayhem_korner
mayhem_korner's picture

 

 

What happens when the debt exceeds the recoverable tax base?  Take your time...

Mon, 10/24/2011 - 15:24 | 1805487 BooMushroom
BooMushroom's picture

Furlough Fridays become Door-to-door confiscation day?

Mon, 10/24/2011 - 09:12 | 1803933 Chuck Walla
Chuck Walla's picture

Anyone who thinks states can outlaw default is An obvious Obama voter.

Mon, 10/24/2011 - 09:19 | 1803959 LawsofPhysics
LawsofPhysics's picture

Yes, sort of like outlawing plate techtonics and bad weather.

Mon, 10/24/2011 - 10:05 | 1804108 chumbawamba
chumbawamba's picture

Can we outlaw stupid while we're at it?  Thx.

-Chumblez.

Mon, 10/24/2011 - 09:00 | 1803895 Johnny Lawrence
Johnny Lawrence's picture

Before we declare all muni bonds to be bad, I'd like to know how long there have been problems in Harrisburg and Stockton.  I wouldn't doubt if these cities have been knee-deep in fiscal problems for years.  This was very true for Central Falls, RI, which was in financial problems for decades.

Mon, 10/24/2011 - 09:05 | 1803914 mayhem_korner
mayhem_korner's picture

 

 

Not all muni bonds are bad.  All that needs to happen is to quarantine all munis in NY, New England, the deep south, MI, CA, AZ and NV.  Otherwise, the default prospects for the rest of the country are probably < 15%.  It's quite bullish.  :D

Mon, 10/24/2011 - 10:11 | 1804121 chumbawamba
chumbawamba's picture

Stockton has been on a downward trajectory for years.  It's a city that really belongs in Detroit.  However, that being said, I wouldn't count it out.  I've seen a lot of tantalizing signs of growth there in the past couple years.  Lots of businesses have moved out that way to take advantage of the rock bottom rents.  I5 (the main artery of California state) cuts right through Stockton.  It's also got a port by way of the California Delta that opens up to the Pacific.  Being in the middle of vast tracts of farmland, lots of agricultural products terminate there.  It has lots of industry currently sitting dormant that will have lots of relevance in a new economy.  Stockton may go under for now but I think it can come back as a strong center of commerce after the fall.

Just FYI.

I am Chumbawamba.

Mon, 10/24/2011 - 11:52 | 1804579 Boxed Merlot
Boxed Merlot's picture

Hunger will probably not be an issue in Stockton as you've pointed out. Weather, topography, (14' above sealevel), agriculture and central location between major travel routes (I5 and the infamous Hiway 99 straddle our east and west borders) including goods to / from the Port of Oakland and the (Uncle Warrens)railroad activity all contribute to it's future economic viability.

Personally, the "strength" of diversity has been overplayed in the community and has created division and subsequent suspicion, isolation and economic contraction.

Rather than "celebrating" our individual racial / cultural "uniqueness", a return to promoting common social goals of security, integration and prosperity would be a better exercise.

Until we can get a handle on the mortgage bifurcation madness and the ensuing 65-75% decline in local residential RE values, Our struggles will continue. The culprits of this debacle have yet to provide restitution to the aggrieved, (individually and collectively-as tax collections show), though they were made whole over 3 years ago.

Seek Justice, Love Mercy, Walk Humbly.

Mon, 10/24/2011 - 12:08 | 1804642 Jena
Jena's picture

The drought of the last few years hit the Central Valley (and Stockton, by extension) hard.  The growth you speak of may be due to the recent relief of that drought.  Let's hope it holds.  Seeing the miles and miles of dead farmland was heartbreaking.

The water wars between Western States in the years to come will be ugly, but inevitable.

Mon, 10/24/2011 - 15:32 | 1805518 BooMushroom
BooMushroom's picture

"The Drought" meaning "The EPA making it illegal to use the water in the delta, to protect an invasive spieces bait fish with no inherent value."

 

Yeah, that was rough.   but the data say Stockton is a crappy place to live anyway: http://www.city-data.com/crime/crime-Stockton-California.html

Mon, 10/24/2011 - 16:05 | 1805702 Jena
Jena's picture

The EPA's suck-balls policy made the worst of a bad situation, meaning the diminished water from the actual drought went to protect the delta smelt rather than grow crops, yeah.

 

Great site, by the way.

Mon, 10/24/2011 - 20:05 | 1806480 Vlad Tepid
Vlad Tepid's picture

The inherent value of the Delta Smelt is to give a convenient excuse for Delta area farmers to shut down the pumps sending their water to the infertile desert called the South Valley.  Those welfare-billionaire farmers dried up Tule Lake a generation ago to make the desert bloom with water intnesive crops like cotton and alfalfa, dried up the Stanislaus River before it reaches the Bay (or the Delta) and now they want to reach into Nature's Switchboard for the California water system and dry up the only natural irrigation farming system in the state?  Fuck them. 

Everytime a Delta conservative farmer type starts to think they might be being robbed, these K Street types sidle up to them with this "Surely you wouldn't support a FISH," argument. 

Mon, 10/24/2011 - 09:03 | 1803910 tarsubil
tarsubil's picture

Can't the Fed just give them some loans to cover their payments?

Mon, 10/24/2011 - 09:08 | 1803924 buzzsaw99
buzzsaw99's picture

or swap for some old road equipment (at brand new 2012 prices)?

Mon, 10/24/2011 - 09:12 | 1803935 ZackAttack
ZackAttack's picture

What do you think Build America Bonds were?

Mon, 10/24/2011 - 09:24 | 1803977 mayhem_korner
mayhem_korner's picture

What do you think Build America Bonds were?

 

A voluntary means of debt enslavement.

Mon, 10/24/2011 - 09:03 | 1803911 sangell
sangell's picture

Time for a remake of the tv series The Big Valley with the ranch in foreclosure, Barbara Stanwyck as a bag lady and her sons dealing meth!

Mon, 10/24/2011 - 09:04 | 1803912 dick cheneys ghost
dick cheneys ghost's picture

California is sending out layoffs notices to 26,000 prison workers...........OUCH!

Mon, 10/24/2011 - 09:32 | 1804006 LongSoupLine
LongSoupLine's picture

Don't worry, it's transitory.  Besides, the BLS has ways of making those numbers "go away".

Mon, 10/24/2011 - 09:44 | 1804040 mayhem_korner
mayhem_korner's picture

California is sending out layoffs notices to 26,000 prison workers

 

Sounds "safe".

Mon, 10/24/2011 - 11:54 | 1804589 Saro
Saro's picture

Don't worry, prison organizations are already lobbying for the government to arrest more people.

Mon, 10/24/2011 - 15:35 | 1805537 BooMushroom
BooMushroom's picture

They could just make a big wall around Stockton, and CA would be OK. The ratio of number of residents in Stockton to the number of sex offenders is 305 to 1.

Mon, 10/24/2011 - 09:06 | 1803919 Catullus
Catullus's picture

I bet no one in Europe own these things. Nothing to be concerned about.

Mon, 10/24/2011 - 09:06 | 1803920 spartan117
spartan117's picture

Score another one for Meredith Whitney. 

Mon, 10/24/2011 - 09:07 | 1803921 Chuck Walla
Chuck Walla's picture

So where does Meredith Whitney go to get an apology?

Mon, 10/24/2011 - 09:20 | 1803963 LawsofPhysics
LawsofPhysics's picture

"So when does Meredith Whitney meet with an unfortunate accident?" - fixed it for you.

Mon, 10/24/2011 - 15:36 | 1805542 BooMushroom
BooMushroom's picture

If she lives in Stockton, it probably won't be long...

Mon, 10/24/2011 - 10:17 | 1804134 Pool Shark
Pool Shark's picture

 

 

"So where does Meredith Whitney go to get an apology?"

She'll have to wait until her prediction comes true.

Still waiting...

Mon, 10/24/2011 - 09:17 | 1803950 warchopper
warchopper's picture

I'm astounded that the markets continue to view these municipal defaults as a non-event. 

Mon, 10/24/2011 - 09:30 | 1803996 WonderDawg
WonderDawg's picture

Same here. It's the same all over the board, though. The markets continue to think there will be some sort of solution out of Europe, too, and we all know in the deepest depths of our souls that implosion there is inevitable. The only explanation is that hope doesn't die easily, even in the face of overwhelming odds. It's a credit to the human spirit, but ultimately it's naive and unrealistic, and will end very badly, particularly for those who stare longest at the disintegrating pixels of a solution.

Mon, 10/24/2011 - 09:22 | 1803969 1971
1971's picture

It's about time. I mean the stupid fuckers at city hall paid Neil Diamond 1 million to be the opening act at there new minor league sports facility. $500k no problem but a cool million, come on. I hope the Stockton PD Union buys the forclosed house next to the city managers house. To increase the leverage in ongoing union talks. Waite the union already did that. First Vallejo and now Stockton, well that covers California's armpits.

Mon, 10/24/2011 - 09:27 | 1803983 LongSoupLine
LongSoupLine's picture

Yeah, I'm sure CNBS will jump right on this just like they did a few weeks ago when they had their full day "Bash Meredith Whitney Marathon" on the 1 year anniversary of her muni's will crash call.

Those fucktards are too bonered-up about CAT's fudged numbers as well as even "fudgier" China PMI bullcrap. 

Mon, 10/24/2011 - 09:32 | 1804005 Carlyle Groupie
Carlyle Groupie's picture

"even "fudgier" China PMI bullcrap"

Jealousy. NO SOUP FOR YOU!

Mon, 10/24/2011 - 09:40 | 1804029 MFL8240
MFL8240's picture

Why arent the people of California outraged by the behavior of Brown and demand he change his give aways fro illegals?

Mon, 10/24/2011 - 15:56 | 1805653 BooMushroom
BooMushroom's picture

California is the land of intentons over results.  Asking to stop giveaways for illegals is racist.  Nevermind that not doing so is killing the state, and that what can't go on forever won't.  If your policy preference explicitly or implicitly goes after a protected class, you're a bad person.

Similarly, if your policy is put forth with the intent to help a protected class, then you are a good person.  It doesn't matter what actual effects your policy has, all that matters is the intent.  The opposite is also true: if your policy is designed to hurt the hated classes (white, rich, christians, bankers) then it is automatically good.  REGARDLESS OF ITS RESULTS.

Remember Obama's remark on Capital Gains taxes.  He would raise them for purposes of "fairness" even if it resulted in less revenue for the government.  The stated purpose is to punish the rich.  The effect is to decrease funds available for all his big government plans.  But the effect doesn't matter in California.  See the 2010 elections for further proof.

Mon, 10/24/2011 - 09:42 | 1804036 EverythingEviL
EverythingEviL's picture

I live in Stockton, it's pretty much a microcosm of the nations problems. So many have lost their jobs. Real Estate is a joke, you can drive down almost any street and see a rediculous number of houses for sale. That's excluding the ones the banks are afraid to put on the market for fear of tanking it even more, but you can tell because no one ever mows the lawns. It's a sad state of affairs

Mon, 10/24/2011 - 09:53 | 1804075 Carlyle Groupie
Carlyle Groupie's picture

Home of the fwee, wand of the bwvave.

Free to pay more taxes. Brave to pay your social security becuase you will never see it [means test].

Fools sinking in quicksand screeming for someone to give them something, anything to grab on to.

I must admit it's fun to watch. Mow your neighbors lawn, work some of that fat off 'merika!

Mon, 10/24/2011 - 09:57 | 1804089 EverythingEviL
EverythingEviL's picture

I probably should have been more specific. I meant you can tell which houses are empty even with no for sale sign because no one mows those lawns

Mon, 10/24/2011 - 10:08 | 1804114 gnomon
gnomon's picture

Hey, China Troll, go play in the street and when you get hit offer up your organs to the CCP instead of forcibly extracting them from some poor Falun Gong. 

We still have more Liberty than you do and until that changes you will always be second best, (at best).

Mon, 10/24/2011 - 10:34 | 1804194 El Gordo
El Gordo's picture

The reasons for this should be obvious to anyone who wants to look.  In order to be a successful, world class city, they need a toy train running throughout the municipality, much like they are doing in Houston and other cities around the country.  They only cost about $1 billion per mile and have been known to have as many as 15 riders at any given time.  Those without trains, too bad, so sad.....

Mon, 10/24/2011 - 10:36 | 1804203 Bastiat
Bastiat's picture

This is not a general defense of Stockton's credit, just a clarification of the fact that this is a pending Stockton Redevelopment Agency default, NOT a City of Stockton default.

California Redevelopment bonds are "Revenue Bonds" -- supported only by specific pledged revenues as opposed "General Obligation" bonds, supported by the full faith and credit of the municipality.  So the a default on these bonds has no direct effect on the City of Stockton's GO bonds.  What it does is kill their Redevelopment Agency, which is dead already with that rating.

In the case of CA Redevelopment bonds, the pledged revenues are incremental taxes -- that is, the property tax increase that happens after the base year (ie. before the redevelopment).  There are no new taxes involved and the entire pledge consists of that tax increment.  Typically to be saleable, the bonds have to show a coverage ratio of 125% or so -- that is, the available revenues have to be at least 1.25 X the debt service.  So you can see how that went to hell in a collapsed real estate market.

Before 2008, almost all Redevelopment bonds were insured (by FGIC, MBIA, AMBAC).  As we know, most of them went down when they got suckered (or corrupted) into insuring CDOs.  This was an essential part of the creating a secondary market (securitization) of subprime and other junk CDOs.   Those insurance policies are likely still in effect on most of these bonds--if so the bond ratings reflect the higher of:  the underlying rating of the isser based on the pledged revenues or the rating of the insurer.

 

 

Mon, 10/24/2011 - 12:21 | 1804699 Jena
Jena's picture

Also, it's worth noting that the State of California is shifting redevelopment agency funding control to the general state budget from individual cities to try and close the state deficit.

That's about $5 billion per year, according to the L.A. Times:

http://articles.latimes.com/2011/jan/20/local/la-me-0120-brown-20110119

 

But it's leaving Stockton and other cities without an important revenue stream.

 

 

 

Mon, 10/24/2011 - 12:59 | 1804863 Bastiat
Bastiat's picture

The State is trying to. It passed 2 laws a the end of June this year, one to eliminate Redevelopment another to allow individual agencies ot continue if they "voluntarily" paid a ransom payment to the state.  The laws have been challenged on consitutional grounds and the State Supreme Court took the case.  The challenge is based, primarily, on Prop 22, voted in last november by 60%, which amended the CA Constitution to prevent the State from taking local funds, including specifically redevelopment funds.  They had done this in the past couple of years to the tune of about $2bln. 

Basically it's all about the unions, primarily the teachers, trying to grab money.  They own the state and they own Brown. 

In any case, the redevelopment bonds will not go away, even if redevelpment does.  All outstanding enforceable contracts are protected. Successor agencies, in most cases Cities, will inherit all the pledged revenues and all the liabilities, exisiting and contingent, associated with redevelopment.

Mon, 10/24/2011 - 13:25 | 1804967 Panafrican Funk...
Panafrican Funktron Robot's picture

"So the a default on these bonds has no direct effect on the City of Stockton's GO bonds."

In my general experience, a default on periphery bonds tends to non-trivially affect the core.  I get what your saying about direct affect, but they are closely associated.

Mon, 10/24/2011 - 13:41 | 1805038 Bastiat
Bastiat's picture

It's never good to have a related entity default--but it's not that bad either depending on circumstances.  

It does have more direct negative implications because the same collapsing tax rolls affect the City.  Oddly though, the tax increment pledge buffers the City somewhat because the marginal impact is felt on the marginal (incremental tax revenues).  The incremental tax that is pledged to the bonds isn't available to the City so it isn't lost to the City.  This only applies in the specific geographically defined redevelopment project areas though.  Still it's a bit of a buffer. 

Overall though, its bad news yeah, not good news.  Stockton's hurting.  I just wanted to point out that the redevelpment agency being on the brink of default doesn't mean the City is. 

Mon, 10/24/2011 - 12:54 | 1804848 ddtuttle
ddtuttle's picture

First,  muni bond insurance is a scam.  There is no way in hell AMBAC, MBIA, or anybody else could handle systemic defaults.  The insurance only boosted the rating of small issues so insitutions could buy them.  The whole thing smells like a set up to jerk cash out small towns all across the USA.

The real wild card in the whole muni story is pensions and union contracts.  Municipalties with unfunded pension liabilties and/or crippling union contracts will default so they can renegotiate those and other obligations.  Right now, everybody is praying the economy turns around and kicks into higher gear so they don't have to make these decisions. Not gonna happen.  When push comes to shove a fiscal shortfall that wouldn't ordinarily cause a default, will start to look very attractive for all these other reasons.  Of couse, the courts wil decide how this ultiamtely plays out.

Default should not be viewed a negative for a small town, its a new lease on life.  The thing to be angry about is how we got into the mess in the first place.

Mon, 10/24/2011 - 13:09 | 1804904 Bastiat
Bastiat's picture

Muni defaults didn't take down the insurance companies, CDO insurance did. It has been said that the rating agencies pressured the bond insurers into "diversifying" into CDO insurance.  This should be investigated since it is a key to the entire AAA CDO fraud.

As for muni bond insurance, it was not a scam. The calculation for whether a premium was worth paying was strickly mathematiciall, comparing the cash cost of the insurance premium vs the PV savings from the lower interest cost.  Pure math for the issuer.  With a typical fixed rate bond, any downgrade risk associated with the insurer is on the investor, not the issuer. 

Municipal bankrupcy is a nightmare. There is very little case law so the unions sue on EVERYTHING.  Huge amounts of money go to the lawyers as a result. This is what happened with Vallejo.  They got in a positon where there was no other way because the unions wouldn't concede but it was (and is) definitely a negative. 

Mon, 10/24/2011 - 13:24 | 1804960 anony
anony's picture

When is default not a default?

When the FED eral govt steps in to give them the money to pay off their deficits, their bondholders, and everyone but those among the populace who paid taxes in the town. THEY do not get bailed.

Coming Soon to a banktrupt town near you.

Mon, 10/24/2011 - 19:55 | 1806449 Vlad Tepid
Vlad Tepid's picture

Couldn't happen to a better hellhole.

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