My last post was motivated by an interesting article in the L.A. Times, written by Chris Megerian, Melody Petersen, and Dean Starkman, that discussed the recent ruling by Judge Christopher Klein, the judge in the Stockton, California Chapter 9 bankruptcy.  As you may recall, the ruling put pension payments on the bankruptcy chopping block.

In that post I predicted that more municipalities would seek Chapter 9 bankruptcy protection due to unsustainable public retirement commitments.  I suspect that Judge Klein’s ruling will add fuel to the Chapter 9 fires.  And I am by no means the only one with that opinion.  In the October 2, 2014 L.A. Times, the perspicacious Melody Petersen reported:

Financially pressed California cities might turn to bankruptcy as a way to cut their increasing pension costs after a judge’s ruling, experts said Thursday.  Analysts from Moody’s Investor Services, a bond rating firm, said that Wednesday’s ruling by a federal judge considering Stockton’s case could open the door for cities to cut retirement obligations — once considered sacrosanct.  In that ruling, Judge Christopher Klein said cities could walk away from their pension obligations — just as they can from other debts.

While I am convinced that other California cities are eventually going to seek Chapter 9 protection — Madhu Ravi’s analysis suggests that an Oakland bankruptcy is on the horizon — there is a very big city in Illinois that I am watching:  Chicago is sitting on the pension obligation edge.  If Chicago were to file, it would undoubtedly displace Detroit as the largest municipal bankruptcy in the country’s history.  How likely is a Chicago bankruptcy?
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Way back on October 13, 2011 I wrote about the coming wave of city bankruptcies.  I quoted several sources which predicted municipal defaults on a large scale.  If you’ve been keeping up with the news you know that the wave is starting to crest.

I.          Recent California City Bankruptcies

In just the last few weeks several California cities have filed for Chapter 9 bankruptcy protection, and many more are close to filing.

A.        Stockton

According to the June 28, 2012 issue of Reuters:

Stockton, California, became the largest city to file for bankruptcy in U.S. history on Thursday after years of fiscal mismanagement and a housing market crash left it unable to pay its workers, pensioners and bondholders.

And all over Stockton you can hear the cheering:  “We’re number one, we’re number one” because they’re the largest governmental entity to file for bankruptcy.  Whoops, not so fast Stockton.  Later in the article we read:

Stockton becomes the nation’s most populous city to file for Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the biggest municipal bankruptcy in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011.  Stockton has about $700 million in bond debt.

How do you like that?  What a disappointment!  Beaten by a county in Alabama!  That’s gotta hurt.  I mention the Jefferson County bankruptcy because when I wrote my October 13, 2011 post, I stated that they had only defaulted on their municipal bond obligations, and had not yet filed.  But they came through with a subsequent bankruptcy filing.

By the way, if you read that October 13, 2011 post I hope you heeded my warning and divested yourself of any investments you may have had in municipal bonds.  As the wave of municipal bankruptcies continues, those instruments are going to drop in value pretty quickly.  Some of them already have junk bond status.
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