Bankruptcy of Stockton, San Bernardino and Mammoth Lakes, California Illustrates the Future of American Municipal Finance

Different Causes, Same Result

Something new happening is not always a good thing.  This past week saw something that has probably never happened before, three California cities filed for municipal bankruptcy.  There are lessons to be learned here, but no lessons anyone wants to learn.

The smallest of the three cities to file was a 7,700 town in northern California.  The reason had to do with the town becoming involved with a developer, something a town this size had no business doing. Mammoth Lakes thought they were getting a good deal, which maybe they were, by getting a private company to improve the airport.

In 1997, the town signed an agreement with Mammoth Lakes Land Acquisition to make improvements to a nearby airport's fixed-base operations. In return, the company would get rights to develop a large hotel project at the airport and an option to buy the land.

But in 2007, the town changed its priorities and refused to move forward with the hotel project until some Federal Aviation Administration issues were resolved. The developer then filed suit and won.

So that bankruptcy can be largely laid to ignorance on the part of town governance.

In Stockton the cause of the bankruptcy is pure California politics and economics.

Stockton, a Central Valley agricultural hub with pockets of entrenched poverty, tried to remake itself during the last decade as a refuge for former San Francisco Bay Area residents. It spent money on a marina, a high-rise hotel and a promenade. They flopped.

The case illustrates that governments are ill equipped to engage in huge development projects.  Local government should provide education services, public protection services, transportation service and the like.  When they try to act like entrepreneurs and venture capitalists they often fail.  Stockton just did it worse than most places.

Finally in San Bernardino the cause seems to be fraud and mismanagement of city government.

City Atty. James Penman said city budget officials had falsified documents presented to the mayor and council for 13 of the last 16 years, masking the city's deficit spending.

"For the last 16 years the budget prepared for the council showed the city was in the black," Penman said, not naming those allegedly responsible. "The mayor and the council were not given accurate documents."

And like many other California communities and the state itself, the economic difficulties of the area are symbols of the fallacy of the idea that government services can be increased while taxes are decreased.

Is this the last of the problems in California, good grief no.  These municipal bankruptcy filings are what Hollywood calls ‘Previews of Coming Attractions’, only the future events they are previews for will not be all that attractive.