Jerry Brown’s been there, done that for much of California politics.  While he has been in state government in his most recent stint for just over four years, his time as Oakland Mayor isn’t really all that distant.  So, you’d think he would carry some street cred with California municipal officials.

Well, considering the massive spending spree with redevelopment projects over the past ten days, that doesn’t look to be the case.  They are, of course, upset about the possible end of the (slush?) funds from the redevelopment agencies, funds that they get to take just a little bit of credit for, but there’s more than that.  Part of Brown’s realignment plan is to devolve some power (and money) to the city and county level, but they aren’t so sure it’s going to happen.  And they have the buttons to prove it:

Ever since the Democratic governor proposed eliminating redevelopment agencies to help balance the budget and direct more money to schools and public safety, cities have responded by pushing projects out the door in emergency meetings to thwart Brown’s plan. But the few hundred city leaders gathered Wednesday at the Hyatt Regency Sacramento were respectful when Brown spoke at their League of California Cities luncheon, never mind the buttons declaring, “Stop the State’s Redevelopment Proposal.”

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“We just don’t have the money right now,” he said later in defense of his Oakland projects. “That’s the problem, and that’s the difference.” (SacBee)

Of course, this austerity thing is the way he’s planned on going for a while.  I’m not sure that it will actually get any right-wing votes in the legislature, or even the ballot box, but it might just be enough to get the DTS crowd to push the vote over the line when it comes to that time in June.

As Robert mentioned earlier, we need some sort of system to encourage redevelopment.  There is a lot not to like in the current system, and its tendencies towards big splashy projects over building quality housing and the like.  Totally demolishing the system perhaps cuts down on the boondoggles, but doesn’t really provide a long-range plan.  And so, the muni’s skepticism is really to their credit.

There are still details to be hashed out, and as the saying goes, there are your details. The realignment plan could ultimately be successful on all ends, but there is going to have to be some convincing going on.

The current budget compromise’s “borrowing” of money from state and local governments could trigger a wave of municipal bankruptcies. There is no provision for states going bankrupt. Inasmuch as states are sovereign entities under our federal system, and protected from suit by sovereign immunity and the Eleventh Amendment, states can simply refuse to pay. However, such a move would certainly trigger a crash in the state’s credit rating and might permanently hamper the state’s ability to borrow money. Just like some banana republic, California would require an IMF-style bailout. That may yet occur, but what is happening now will likely trigger municipal bankruptcies across the state.

More on the flip.

Under Proposition 1A of 2004, the state may borrow local government monies in a fiscal emergency. The current budget proposal includes several billion in such transfers. It is not at all clear to me that these are ‘borrowings’ at all, and appear to be permanent takings; as such, they are probably subject to challenge in court. (Not as a “taking” but as a violation of 1A-2004.)

The City of Long Beach claims that the current deal would deprive them of an additional $48m on top of a deficit almost that size. Nearby, in Orange County, the small City of Placentia is saying>:

Placentia city officials are howling in effort to keep state hands out of their coffers. The plan to seize millions could bankrupt the city, they say.

“We may have to declare bankruptcy – that’s how serious this is,” said City Administrator Troy Butzlaff. “This is something the system can’t endure. We just avoided bankruptcy by doing all the right things; by cutting back, by getting concessions from staff, by cutting $4.5 million over last year’s budget.”

Chapter 9 bankruptcy exists entirely for the purpose of adjusting municipal debt. It is much easier for municipalities to rewrite collective bargaining agreements under Chapter 9 that under the normal restructuring-style bankruptcy (Chapter 11).

Since the state of California can simply not pay, it has greater leverage in restructuring its debt, but may pay a higher long term price in its borrowing. (Arguably, the risk of a Chapter 9 is “built in” to the risk premiums on credit extended to municipalities, and, while the risk of sovereign default is built in to loans extended to California, going forward the calculus would be more changed in the latter case than in the former)

Is this a good idea? Would the state of California be more likely to get a federal bailout? (a loan facility, a direct cash payment, or a debt sur-guarantee by the treasury?) Yes, more likely than the cities. I don’t know the answer if it’s a better idea to protect the state’s credit than it is to create a further series of municipal bankruptcies. I think that will depend on whether you live in such a place.

The state’s fisc is structurally broken. Local governments strain under the same revenue strictures. California already has a long list of infamous chapter 9s, such as Vallejo in 2008 and Orange County in 1994.

One could argue that we simply have too many local government agencies. That may be the case. But unless there is a strong overlap of services, there wouldn’t be much savings. Nevertheless, given the current baseline, I would predict we will have between 2 and 6 municipal bankruptcies in 2009, with LAFCOs considering the elimination of smaller cities and districts.

UPDATE:

The Prop 1A-2004 borrowing has passed both houses.

Yesterday morning NPR ran this report on housing prices:

Economists say home prices are nowhere near hitting bottom. But even in regions that have taken a beating, some neighborhoods remain practically unscathed. And a pattern is emerging as to which neighborhoods those are.

The ones with short commutes are faring better than places with long drives into the city. Some analysts see a pause in what has long been inexorable – urban sprawl.

This is a predictable fact of soaring gas prices. Older city centers have more commute options, and usually shorter commutes period, meaning less gas consumption. This eliminates a key source of pressure on household incomes.

In fact, we can see a similar pattern here in California. The areas hardest hit by foreclosures are those places with the longest commutes – Stockton, Modesto, the SoCal Inland Empire. And when did the housing bubble begin to burst? Late 2006 and early 2007, as gas prices broke through the $3 barrier for good.

This view is bolstered by a new study and widget from the Center for Neighborhood Technology. It shows that once you factor in transportation costs, living in a city center is just as, if not more affordable, for a middle-class family than a suburb – at least in Seattle (a typical West Coast city with sky-high rents and home prices in the city center).

All of this reinforces the point I made last August in Redefining the California Dream, where I argued that the only way lower- and middle-income Californians will have economic security and be able to afford the cost of living is if we abandon the obsolete 20th century model of sprawl and embrace the 21st century model of elegant density.

It would help, of course, if folks like Zev Yaroslavsky would stop spending their time trying to prevent this necessary shift in living patterns. We need to bolster affordable housing policies, provide mass transit alternative, and zone for walkable communities if we are to avoid a situation where we merely exchange the inner city slum for a suburban slum.