Mike Shedlock

As part of a growing trend, Compton California is on the verge of bankruptcy. When it files (and it will eventually), it will become California's 4th city to do so.

The Huffington Post reports Compton Will Run Out Of Funds By September 1

Compton, Calif. could be the fourth city in the Golden State to seek bankruptcy protection.

At a city council meeting Tuesday, officials announced that Compton is set to run out of funds by Sept. 1. Compton, which has only 93,000 residents, faces a deficit of $43 million after having depleted a $22 million reserve, reports Reuters.

"I have $3 million in the bank and $5 million in warrants due in the next 10 to 12 days," said city treasurer Doug Sanders during the live-streamed city council meeting. "By then, the council will have a decision to make: don't pay the bonds, default on them, or have a serious talk about bankruptcy."

Standard & Poor's put Compton's revenue bonds on a negative credit watch last Friday, citing concern over allegations of "abuse of public moneys" and fraud, reports the Los Angeles Times.

S&P also warned that unless they receive independently audited financial information from Compton, the city's ratings -- already at BB, or "junk" status -- could be withdrawn or suspended.

Compton may not be able to meet S&P's demands in time. The city's independent auditor, Mayer Hoffman McCann, recently declined to sign off on the city's financial statements and quit the account entirely, reports the Times. The firm stated that they couldn't get anyone at the mayor's office to cooperate with the audit inquiry.
What's to Consider?

Compton is clearly broke so there is noting to consider. The LA Times has more grim details in Compton on brink of bankruptcy.
City officials announced that Compton could run out of money by summer's end, with $3 million in the bank and more than $5 million in bills due.

A longer-term problem is a $43-million deficit that the city amassed after years of improperly using money from water, sewer and retirement funds to balance its general fund. Compton will have to pay the money back at a time when it has no reserves and has been frantically cutting costs.

The state of these cities underscores the complexity of the fiscal crisis roiling California municipalities this year, with Stockton and Mammoth Lakes already in Chapter 9 bankruptcy. While ballooning public pensions and falling property tax revenues have hit many cities hard, bad accounting practices and improper use of funds have also taken a toll.

In many cases cities resorted to these measures because they could not balance their books or raise revenues but were loath to make cuts.

A recent grand jury report found that the High Desert city of Victorville used a series of disparate, possibly illegal measures to stave off insolvency. Those included dipping into sanitation funds to help keep the city's treasury afloat, loaning water agency funds to bail out the city's electric utility and siphoning $2 million in airport bond funds to buy land for a city library.

The inter-agency borrowing was so questionable — with $69 million sloshing around City Hall as of June 2011 — that the Securities and Exchange Commission launched an investigation, which is ongoing.

In Montebello, state auditors last year said they were troubled to learn that the city regularly used money designed for specific purposes to balance its budget — in apparent violation of the law.

"It appears that the City moved money wherever it wanted, whenever it wanted, regardless of the law or the intended purpose of those taxpayer dollars," Controller John Chiang said in a statement.
Victorville, Montebello, Los Angeles, Oakland

It's a safe bet to add Montebello and Victorville to the list. Moreover, some of the big guns will eventually go under as well.

Unsound pension problems will be the death of many cities. I consider Oakland and LA to be sure things. It's just a matter of time.

Delays in filing will only waste more taxpayer money. Eventually cities will catch on and there will be a flood of bankruptcies.

S&P Revises Pennsylvania's Outlook to Negative

Citing pension problems and a slowing economy, S&P Revises Pennsylvania's Outlook to Negative
Standard & Poor's Ratings Services changed its outlook to 'negative' from 'stable' for Pennsylvania's general obligation debt because of growing spending pressures, particularly for public pensions, and a slow-growing state economy, the agency said on Thursday.

S&P affirmed the 'AA' credit rating on the state's general-obligation debt, but said it could lower that rating a notch in the next two years if Pennsylvania does not enact pension reform.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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