Sunday, January 9, 2011

Chowchilla's Day of Reckoning

The San Joaquin Valley town of Chowchilla, known for it's dairy farms and state prison, was a growing town in a pretty part of California. Revenues from local farms and state employees fueled a dandy boom in the 1990's. Property values skyrocketed as Bay Area residents built townhomes to get away from it all. We all know the ending to this story.. it's happened nearly everywhere in America.

This month, the City of Chowchilla has defaulted on a bond that was issued for the renovation of the City Hall building.. which houses a city government that has been forced to slash their workforce by 45% since 2009. The City Hall building itself is nearing the point of being repossessed. Chowchilla's 18% unemployment rate, plummeting property values and reduction in the size of the prison workforce has left this small town with big debts and little hope of solvency in the medium term. Assistant City Administrator Wayne Padilla said Thursday that he negotiated with the bond trustee to draw down on the bond reserves Friday to make the January payment. This year they're using various measures such as this to plug the $1 million hole in the city's budget.

The problem is that there are few bond reserves left to tap, and the city's revenues are continuing to decline. "The question remains.. what do we do about the debt next year ?" said Padilla. "We have not decided whether or not to make the debt payments". Padilla took over in 2009 and discovered that the small surplus he thought he was inheriting was because they were in default of Mello-Roos bonds, which are issued for major infrastructure improvement projects. Worse, many home development projects were going belly up, leaving half built townhomes and falling city revenues as the construction projects.. and their workers.. left. The local brake manufacturer, pretty much the only industry in the small town other than farms, was slashing staff. Sales tax revenues plunged.

Padilla, who is the city's Assistant City Administrator, is also the city's Finance Director. The acting City Administrator is also the Chief of Police. But at least they have jobs. Padilla has worked with the city's police and other employees to cut pay and paid vacation in order to save jobs. He also plans on an additional "tax measure or two" by way of ballot measures to get through the tough times.

One of the few people to prosper during these dark times is one of the Chamber of Commerce members, Lee Brock, who owns a locksmithing businesses. As he makes another key for yet another foreclosed home, Chamber member Brock seemed optimistic "It'll take a while, but I'm optimistic". As his business flourishes, he can be. Most residents are not so upbeat.

Tomorrow, California's Governor Jerry Brown will present his budget and ideas on how to close California's $24 billion budget hole. Nearly everybody is going to take a hit; cigarette and gas taxes will soar, the state's university system will see further slashes. The City of Bell looks to also be in some serious trouble. One area that will undoubtedly be slashed is aid to city and local governments. Ben Bernanke added yet more misery to the mood last Friday: "We have no expectation or intention of getting involved in local finance. The states should not expect loans from the Fed". My fear is that Chowchilla's story will become all too common in 2011.

Update 1/10 7pm: Governor Brown unveiled his budget plans, and apparently a big part of the plan involves "realignment".. which is another way of saying that he plans to shift responsibility for some state programs onto already overloaded local municipalities like Chowchilla. It includes $12.5 billion in budget cuts and he plans on a June statewide referrendum to raise taxes by $12 billion. I'll give him this.. he's not just giving us smoke and mirrors like Schwartzeneggar did.. he's tackling the monster head on and means to solve it once and for all. Oh yes.. and it appears that Portugal has cried uncle.. the Central Bank of Portugal has said today (after EU trading hours) that it could use external financial support. Next domino.. Spain. I'm going to keep a close eye on Spanish bonds here; Spain could follow Portugal in rapid succession unless something very forceful is done to reinforce both Portugal and Spain.

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