With a $24 billion budget deficit,
California certainly seems to be on its way to a major financial
crisis. And many of the Golden State's municipalities are on
bankruptcy's precipice, too.
While the city of Vallejo in Southern
California filed for Chapter 9 more than a year ago on May 23, 2008,
many more municipalities are at risk of seeking protection from
creditors under that section of the federal bankruptcy code, which is
specifically for cities, counties, townships, school districts and
public improvement districts.
Since Vallejo's filing, The Deal Pipeline (subscription required) has tracked five California cities and towns that are
teetering on the verge of bankruptcy, with the most recent one being
Oakland, which has a $100 million budget deficit. Other cities and towns close to
seeking Chapter 9 protection include Half Moon Bay (which owes $18
million for a land dispute settlement), Pacific Grove (which is having
trouble managing budget problems and entitlement obligations), Stockton
(with a deficit expected to reach $30 million by June 2010) and Rio
Vista (whose officials said that it may not be able to pay its bills
through 2009).
At least municipalities have the Chapter 9 option.
California can't seek such protection. It instead faces a default on
its obligations, which will make it much harder for it to raise money
in the bond market and get out of its current malaise. Several states either defaulted on or repudiated their debt between 1841 and 1843
following an economic depression in the U.S. California
certainly doesn't want to revisit history 166 years later. - Carolyn Okomo
See related story from Breakingviews via The New York Times
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