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Saturday, November 21, 
8:53 am

California, its municipalities hit the skids

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California_flag_125x100.gifWith 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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