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San Joaquin Valley's Chowchilla defaults on a bond

Reflecting the struggles many cities face, the town fails to make a payment on the bond issued in flusher times to renovate City Hall. But an official says reserves will be drawn down to cover the payment.

January 07, 2011|By Lee Romney, Los Angeles Times

The San Joaquin Valley town of Chowchilla — known for its dairy farms and prisons — has defaulted on a municipal revenue bond, underscoring the tight times and drastic choices faced by struggling California cities.

The city, which has a skeletal manufacturing base, failed to make its January payment on a bond issued in much flusher times to renovate the ample City Hall, which houses a government that has seen a 45% cut in its workforce since mid-2009.

But Assistant City Administrator Wayne Padilla said Thursday that he had negotiated with the bond trustee to draw down on bond reserves Friday and make the January payment, the last one due for this fiscal year.

The default comes as the city of Bell in Los Angeles County teeters on the edge of insolvency because of inflated salaries and alleged fraud and other cities struggle with unfunded pension obligations and ballooning healthcare costs.

Chowchilla, which has been hit hard by plummeting home prices, an unemployment rate near 18% and commercial vacancies, has cobbled together one-time plans to plug this year's $1-million budget shortfall.

But more solutions are in order if the city hopes to avert an eventual repossession of its seat of government, which includes 5,000 square feet of commercial space that now sits empty.

"The question remains, 'What do we do about the debt next year?' " said Padilla, who is also the city's finance director. "The decision hasn't been made one way or another whether we're going to be able to make the debt payments."

Chowchilla, cleaved by California Highway 99 and known for its annual Western Stampede, expected $4.1 million in revenue this fiscal year, but faced $5.2 million in budgeted expenses. It failed to make its January bond payment after drawing down on reserves to make a payment last summer, he said.

Other cities are also feeling the pinch. The Bay Area's Vallejo took the most extreme route when it filed for bankruptcy in 2008 after it became clear that the city's police and fire labor contracts sucked up much of its general fund.

Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said he hoped Chowchilla "will be an isolated case.... There's no imminent threat of widespread municipal defaults in California."

But he called it "another black eye" for the state.

"Our concern is when a city defaults on its bond payments, if nothing else, the reputation will stain," he said. "It bleeds onto other local issuers and the state.... It's an event that California does not need. We've got enough problems operating in the market."

Municipal bond analysts agreed Thursday but stressed that a wave of other cities — particularly those with investment ratings that must go to market regularly to borrow cash — are not likely to follow suit. Chowchilla had no underlying investment grade, though the bond insurer was rated.

"It's a remote location without major industry, without a major investment grade rating," said Chris Ihlefeld, co-portfolio manager with New Mexico-based Thornburg Investment Management, which manages a limited-term California fund. "If you were going to anticipate a default anywhere, a city like Chowchilla doesn't surprise me at all."

Ihlefeld added that events like these create opportunities.

"There's a general perception among municipal bond buyers, 'Let's avoid any and all things California,' and that's just not the truth," he said. "Most of California is actually doing fine. Even if there is a measure of weakness, which we've all been dealing with, there is a huge gulf between a municipality experiencing some weakness and the probability of a municipal default happening."

David Mora, West Coast manager for the International City-County Management Assn., called the default "a last resort option. We'll probably see a few more as the finances of all local government really comes under considerable pressure," he said. But "bonds generally have the first call on city revenue."

Padilla took over as Chowchilla's finance director in 2009 to discover that the city was already in default on some Mello-Roos bonds, which are issued by certain voter-designated cities, counties and special districts to finance major improvements and services. Money that was dedicated to the bond payments had gone into the general fund instead, leading city leaders to mistakenly believe they had a million-dollar surplus.

It disappeared overnight, as Padilla set the other bond matter right. The city also suffered from the whiplash that has visited many communities. Bay Area and other urban refugees flowed in during the housing boom, plopping down cash for second homes and retirement living near the Pheasant Run Golf Club.

But the economy caught up with the town of 19,000 residents, nearly 8,000 of whom are prisoners. In addition to farms, there are two car dealerships, a small shopping center and an insulation and brake manufacturer, making for a thin sales tax base.

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