Friday, July 1, 2011

Insolvency Watch: Oakland, San Francisco Scrape By, Montebello Falters

It wasn't looking good for a while, but we have news today that the city of Oakland has managed to reach a tentative deal with its unions that will close its $58 million budget deficit. Essentially, the budget hole was resolved in two chunks: first, the City Council agreed to the $28 million sale of the Henry J. Kaiser Convention Center, and second, the city's unionized employees (including its police and firefighers) finally backed down and agreed to $30 million worth of concessions. The cuts will result in pay cuts for many Oakland workers, city offices will see 15 unpaid furlough days, and as many as 200 could be laid off. Apparently, even the firefighters realized how bad Oakland's finances were, as fireman Chuck Garcia even used the dreaded b-word: "It's better for us to make concessions now than going bankrupt. Bankruptcy isn't good for anyone, including the citizens of Oakland." Meanwhile, across the Bay in San Francisco, it looks like agreement has been reached on a new budget for the next fiscal year. This news was less climactic, as Mayor Ed Lee's June budget proposal was largely adopted, apart from a few last-minute tweaks. Rising property and payroll tax revenues closed about 10% of the city's deficit, which was estimated at $306 million; in addition, $35 million in capital projects were put off, $26 million was cut from police funding, and over $18 million will be saved by delaying cost-of-living increases to all city contracts. San Francisco will also draw down half of its $30 million reserves. While we commend Lee's creativity in finding a budget solution that avoided layoffs, it's probably a moot point given the city's gargantuan pension debt.

On the other hand, things continue to look grim for the Los Angeles County city of Montebello. Back in the spring, state controller John Chiang launched an audit of the town's finances after allegations that it had falsified its financial records and was close to bankruptcy. Since then, the federal Department of Housing and Urban Development has demanded repayment of $5 million in misappropriated housing funds, and Moody's has downgraded the city's debt to junk status. Yet with a possible bankruptcy looming this month, the LA Times is reporting that it's troubles are getting even worse: apparently, you can add the FBI to the list of agencies investigating Montebello's finances. The J. Edgars are interested in the misuse of HUD funds, in particular a $1.3 million deal the city made to construct affordable housing in 2008. The apartments were never built, even though the city recorded the project as complete in its HUD database. The FBI is concerned about an audit by HUD's inspector general, which concluded that Montebello had given the developer the money without a valid written agreement in place, and had tried to deceive the auditors about it. Yesterday Montebello filed a lawsuit against the developer, alleging that he "defrauded the city by artificially inflating the cost he allegedly paid for the land and getting a kickback through a real estate company he controlled." But ultimately we're guessing that won't help them much.

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