Suddenly it's become the thing to do - or at least to think about. The city has $3 million in the bank and $5 million in obligations, according to Treasurer Douglas Sanders. Why not declare bankruptcy and call it a day? It's worth noting that deficit financing isn't exactly a new problem, and up to now cities have used the credit markets to borrow what they needed. Prior to Stockton filing for Chapter 9 protection (and San Bernardino seriously considering it), a town like Compton probably wouldn't have considered such a drastic step. But as more municipalities resort to bankruptcy court, the stigma might be fading - and that's a worrisome development because filing for bankruptcy is not a great option. It takes a very long time, and in the case of Vallejo, doesn't resolve all that much. From KPCC's Business Update (Susanne Whatley was filling in for Steve Julian):
Whatley: Who are the creditors?
Lacter: Not just banks and corporations, but real people - could be retirees who worked for the city and face big cuts in their pension plans; or even bondholders who had been assured that investing in a local government was extremely safe.. Well, most muni bonds are still very safe, but lawyers for the city of Stockton would like to see investors share in the pain, even though no city has forced bondholders to take less than the full principal (and that goes back to the 1930s). Opening up that possibility would be a huge deal for other cities. Of course, bankruptcy filings are likely to remain very unusual - the political ramifications are just too great.
Whatley: Does that explain why it's not likely to happen in Los Angeles?
Lacter: That's part of it. A guy like Mayor Villaraigosa is obviously very ambitious (as are members of the City Council), and it's just hard to imagine that they would want the stain of a bankruptcy filing on their resumes if they could at all avoid it or delay it. But politics isn't the only reason an L.A. bankruptcy is extremely unlikely. You know, for all its troubles, the city is large enough and its economy is strong enough to have the financial resources that a smaller town like Stockton doesn't have.
More on the Compton situation from the LAT:
The city controller told council members that the city should be able to make payroll through Sept. 1. The city's financial issues have been a potent political issue for more than a year. The general fund has accrued a deficit of more than $42 million, and the city has consistently fallen behind on payments to vendors, including its sheriff's contract. More recently, the city's independent audit firm refused to sign off on the annual financial statements and quit, after Mayor Eric Perrodin wrote a letter to the state controller's office alleging fraud might have contributed to the city's financial issues and asking for an audit.