The struggling city of Bell has ousted its overpriced executives. But its money troubles are far from over, thanks to a huge debt load.
By the end of the credit and real estate bubbles, Bell had amassed more than $77 million in direct debt. The city's debt burden today clocks in at nearly three times its annual revenues. Debt in far wealthier New York City, by contrast, is less than 1.5 times its revenues.
Bell's residents approved much of this debt — although it now turns out that a tax hike that pays for some of it may have been illegal. Either way, residents alone don't bear responsibility: Underwriters, guarantors and bondholders — who should have known better — were the city's enablers.
The popular narrative is that city leaders took advantage of its poor, Latino populace whose "civic engagement traditionally has been muted." But the Bell story is not just about unengaged residents. It's also about supposedly sophisticated investors whose indifference to a deeper problem — untenable debt levels — is even less excusable.
In late 2005, Bell had a problem. It owed money to CalPERS, the state pension fund, for benefits that the city's workers had already earned. Bell didn't have the cash on hand, so it borrowed more than $9.2 million. The bond deal should have raised questions.
Financiers and investors should have wondered why, if Bell was already struggling to pay for past benefits, the city had agreed to expand pensions for nonunion workers in 2003 — including an extra 1% cost-of-living allowance for City Council retirees only, 50% higher than other workers got.
The underwriters should have balked too at Bell's plan for $1.5 million of the borrowed funds: The city wanted to use them to refinance a similar pension bond issued five years earlier.
Moreover, Bell was expanding its indebtedness even as its long-term debt burden had increased by 15% in the previous year — a big jump for a little town.
Two years later, in 2007, Bell increased its outstanding debt by nearly half, borrowing another $35 million to expand a sports complex, build a theater and improve parks. Global bank Citigroup did the deal, despite the fact that in the previous year, Bell had hiked its long-term debt obligations by another 17.6%.
Advisors and investors didn't worry about whether the city was capable of successfully taking on such an ambitious public works program. Nor did they wonder whether Bell would have the capacity to repay the debt and provide public services once the bill came due.
The due date, anyway, was far in the future: Just like some subprime mortgages, the bond deal came with four years' worth of interest-only payments. Annual costs would rise abruptly — by 42% — in fiscal year 2012.
Why the lack of concern? California was in the last throes of a free-money boom. In its bond documents, Bell boasted that its property values had soared by double-digit values in just one year, even as most of Los Angeles County experienced only single-digit gains. The growth rate was supposedly a sign of health.
Bell's general fund revenues, buoyed by taxes on higher property values, skyrocketed by 28% after inflation between 2000 and 2006. As it embarked on its borrowing spree, Bell was running double-digit budget surpluses.
Ensconced in a bubble, underwriters and investors, as well as the insurers who guaranteed some of Bell's debt against default, probably figured that if Bell had a cash crunch, the city could refinance, as Bell had done with its initial 1998 pension bonds.
Such prospects now look dim. As Standard & Poor's analysts noted Tuesday when they downgraded Bell's municipal bonds, the city may struggle to refinance a big payment on yet another $35 million bond before it comes due in November.
Where does Bell go from here? One tax for Bell's pension debt has already risen by nearly 50% in four years. Even as officials were paying themselves handsomely, they slashed public services, as public money was already finite.
Will voters be able — or willing — to pay even more, as services further deteriorate? Bell homeowners, with an average per capita income of less than half California's average, already pay the second-highest property tax in Los Angeles County, 34% above the norm. On Friday, state Controller John Chiang said the rate had been raised more than was legal. Can Bell residents shoulder an even higher burden?
And an even bigger question looms: How many Bells are out there, posing a silent risk to the financial system through the possibility of more investor losses — and thus posing a risk too to the state and the nation's economic recovery?
Nicole Gelinas, contributing editor to the Manhattan Institute's City Journal, is author of "After The Fall: Saving Capitalism from Wall Street and Washington." This piece was adapted from city-journal.org.