By Rich Smith, The Motley Fool 04/17/12
Posted under: Economy, Taxes,
Banking
Faced with the
prospect of becoming the biggest municipal bankruptcy in U.S. history, in
February, the city of Stockton, Calif., decided on a
novel gambit. To avoid going "bankrupt," they'd simply stop paying
some of their bills, leaving more money to pay their other bills.
Specifically, Stockton's
City Council decided to skip a $779,935 payment to Wells Fargo (WFC), owed as an installment on $32.8 million
worth of bonds issued to finance the construction of two downtown parking
garages. So problem solved, right? No? Oh, well. It was worth a try.
Hey! Who Stuck This Boot on My Parking Garage?
There was just one problem with Stockton's
plan. The garages themselves, and the income generated from them, secured the
city's duty to make payment on the bonds.
So when Stockton reneged on its obligation to
pay, Wells Fargo
took 'em to court... and won. The Superior Court
of San
Joaquin County ruled
last week that Wells Fargo
could repossess the garages and attach the parking revenues as payment on the
bonds.
In essence, Wells Fargo issued Stockton a parking ticket, and booted its
garages pending payment.
Needless to say, Stockton's not thrilled with
this result, and says foreclosing on the garages is not a "permissible
remedy" under California
law. And yet it just happened, and a California
judge OK'd it.
What It Means to You
It's tempting to
dismiss all this with a simple "Serves them right, those crazy,
spendthrift Californians." But if you're a resident of a U.S. town or city -- and according to the
government, 82% of us live in urban areas -- then Stockton's misfortune holds a lesson for all
of us:
Debts, once incurred, must be repaid. And bankers will insist on getting paid.
Stockton got itself in this mess through massive spending during the housing
boom, on everything from baseball stadiums to parking garages to overgenerous
pension benefits for public employees. But Stockton's not alone. Just in California, the 24
biggest municipal pension plans are underfunded by a
collective $136 billion -- half the level they need to be to pay on the
promises they've made. Attempts to rob Peter to pay Paul (or rob Wells Fargo to pay Paul the
retired policeman) are going to cause increasing amounts of pain in the months
and years to come.
Stockton's impending bankruptcy may become the
biggest in U.S.
history. It won't be the last.
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