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Atwater, Next In A Tidal Wave Of California Municipal Bankruptcies 

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. Chriss lives in Newport Beach, CA.

Atwater, California, just admitted they did not have the cash flow to make a $2 million municipal bond payment due in November and may become the 4th local California government file for Chapter 9 municipal bankruptcy this year.  The farming community of 28,000 residents has been strangled by the battle with environmentalists more interested in protecting the lifestyle of a two-inch fish called the Delta Smelt than family farms.  Burdened with crippling unionized public employee wage and pension costs, while private sector wages and property values drop, Atwater is the latest in a soon to be tidal wave of local government failures. 

Beginning in 2007, Federal Judge Oliver Wanger imposed limits on the amount of water pumped from the San Joachin-Sacramento River delta to farms in California's Central Valley in order to protect the Delta Smelt.  As a result, hundreds of thousand acres of farmland lie fallow, and tens of thousands of jobs were lost. Over 200,000 farmers, migrant workers and their family members were financially devastated.  Homeless shelters and bread lines were overwhelmed as crops withered and banks foreclosed on family farms.  Local public schools continue to report rising malnutrition as many proud families are too embarrassed to take government welfare.

When the U.S. House of Representatives Congress passed San Joaquin Valley Water Reliability Act (H.R. 1837) to try to restore the water flow, California’s two U.S. Senators, Barbara Boxer and Dianne Feinstein, fought off the legislation in July by convincing President Obama’s senior advisors to recommend a Presidential veto.  A disgusted Speaker of the House John Boehner said on the House floor that using the Endangered Species Act to protect a fish at the expense of food production and economic growth is “a perfect example of the overreach of government”.

The median home price in Atwater has plunged from $336,000 in June of 2007 to just $140,000 today and unemployment has surged to 21%.  The 2010 Atwater median household income was $42,226, 19% below the national average of $51,914.  Almost a fourth of the population is now considered below the poverty line, compared with 13.7 percent statewide, according to U.S. Census figures. 

Even with all this pain and suffering, Atwater’s city tax revenue fell by only 20% since its peak in 2007.  Atwater did reduce its bloated union payroll from 120 to 80 since 2008, but mostly through attrition and laying-off low paid younger workers.  To keep the lights on the city depleted its cash reserves, while union wages continued to rise and the city agreed to pay all general employees’ portion of mandatory pension contribution and all but 2% mandatory contribution for highly paid police and firefighters.  The city’s also continued to pick up most of the cost of health-care premiums that rose by 15% this year and are scheduled to rise 10% next year.

With the threat of bankruptcy, wages may now be slashed.  According to Atwater Mayor Joan Faul, “We just started negotiating with our unions and they are going to have to take a major cut," Mayor Joan Faul said.  "We hope that once we declare a fiscal emergency that they will realize that we are definitely in an emergency.  If they want to save all the jobs, everyone is going to have to take a cut." 

Standard and Poor’s seems to have been shocked to learn that city is broke and hacked Atwater’s Public Financing Authority’s wastewater revenue bonds solvency rating on September 24th from a strong credit-worthy A rating to a BBB- junk-bond rating. 

Under a state law passed by California’s ultra-liberal legislature and signed by Governor Jerry Brown last year, cities seeking bankruptcy protection are forced to first declare a fiscal emergency or hold talks for 90 days with creditors through a mediator or wait for 60 days if they run out of money.  With Atwater and many other local government cities and agencies about to bounce payroll checks, California bankruptcy courts are going to need to go on a hiring binge to handle the coming long lines of municipal failures.   Cross-posted from Chriss Street's blog.        

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