Another U.S. City on Brink of Bankruptcy

Another U.S. city on the brink of bankruptcy…

Stockton, California, a farming town near San Francisco with a population of 292,000, is meeting with creditors and labor unions this week to discuss how it can avert filing for bankruptcy due to its massive budget deficit.

In an attempt to avert bankruptcy, the city laid off almost 200 city employees, including a quarter of its police force. With the numbers not adding up, and facing a budget deficit of $2.00 million in 2012, the city was forced to ask creditors and the labor unions to sit down and discuss budget cuts in order to reduce the budget deficit for this year.

See if this sounds familiar dear reader. Before the recession—during the good times—the city took on a large amount of debt, expecting that continued growth going forward would pay for it; no budget deficits in sight. Well, now that revenues are down drastically, this debt has the city in a stranglehold.

Stockton’s city council is aiming to reduce the current budget deficit by $15.0 million, which would include defaulting on debt payments on the municipality’s bonds along with other budget cuts. That is just scratching the surface on the city’s terrible financial situation.

Stockton has unfunded liabilities—mostly made up of pensions and health insurance—of $450 million. Although high, it was more manageable when the city took in revenues of over $203 million. For 2012, the city is hoping that revenues will exceed $160 million! That is quite the budget deficit!

During the good times, the average home price in Stockton was $431,000, which helped increase city revenues and keep the crime rate relatively low (no budget deficit). In 2011, the average home price fell to $142,000 and unemployment is the eighth highest, when compared to all cities in the U.S., at 15.9%. The crime rate—when compared to other U.S. cities—now falls in the highest group; among the top 10 across the nation!

In response to the bankruptcy of Vallejo, California, in 2008, the State of California passed a law that forced cities to work with an evaluator for at least 60 days to discuss budget cuts, before being able to file for bankruptcy with the courts. Stockton has now initiated this process. If no agreement is reached on its budget deficit, then this will be the next city to fall.

As we move deeper into 2012, Stockton will unfortunately not be the only city we will hear about, as budget deficits grow throughout the U.S.

It is important to note however that the cities across the U.S. have been instituting budget cuts in an attempt to balance their budget deficits.

In 2010, $433 billion in long-term municipal bonds was issued. In 2011, this number was down almost 32% to $295 billion. This is evidence that the cities are cutting back and not issuing as much debt; necessary, and a good sign.

As I’ve been writing, the headwinds in the unemployment numbers will include the layoffs coming from budget cuts instituted by cities across the U.S., as they attempt to cut budget deficits in the face of drastically reduced tax revenues.

The stock market is assuming that 2012 will be a year where the U.S. economy rebounds. Tell that to the citizens of Stockton.

Where the Market Stands; Where it’s Headed:

Final market numbers in…

The Dow Jones Industrial Average gained 2.5% in the month of February. This is on top of the 3.5% the world’s most widely followed stock market index gained in January.

But yesterday was a big down day for the markets. In testimony before Congress yesterday, Fed Chief Ben Bernanke played down the chances of further quantitative easing (QE3), and that’s something the stock market doesn’t like.

The stock market rally of the past two years has been fueled by worldwide expansion in the circulation of currencies—money printing. Turning the printing presses off will, in my opinion, crash the markets.

But let’s not react with fear just yet. If the economic situation deteriorates (I believe we are in that process now), the printing presses will run overtime. Don’t count this bear market rally out just yet.

What He Said:

The year 2000 was “a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats; this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.