Will Santa Ana Declare Bankruptcy?

Ever since the Bay Area city of Vallejo declared bankruptcy back in 2008, observers of the California political scene have waited for more such dominoes to fall. With Meredith Whitney's recent prediction of a wave of sizable muni defaults across America, these fears have only intensified. Now, Voice of OC wonders whether the Orange County city of Santa Ana will be the next municipal bankruptcy in the Golden State.

We've been following Santa Ana's troubles for a few weeks now. To recap: the city's most recent budget looked reasonably balanced until the new fiscal year began; then, Sacramento's budget called for the seizure of its redevelopment money and vehicle-license funds, CalPERS increased the city's contribution requirements for its retirement benefits, and tax and fee projections began coming up short of the city's optimistic projections. Just like that, Santa Ana turned into a city with a $30 million budget hole, few reserves, and massively inflated personnel costs. The leadership there has begun considering plans to outsource over a dozen public services, including its fire department, its libraries, and the Zoo. Still, with cost-cutting negotiations with city unions having only begun, the option of a Chapter 9 filing is being discussed more and more at City Hall.

Whether or not Santa Ana ultimately opts for bankruptcy, of course, is an open question. To the extent that being a municipal government means never having to say you're sorry for accounting fraud, it's still possible that the city could find a way to balance its budget on paper. Back in June, you might recall that the city of Oakland was staring down a $58 million deficit in the fiscal year's eleventh hour. How did Oakland escape this? $30 million of the solution came from union concessions, but $28 million came from selling a blighted convention center to the city's redevelopment agency. Yes, you read that correctly: Oakland was able to erase $28 million in deficit by selling a building no one wanted from one part of the government to another. The underlying problem, of course, will still be there, but the point is that dubious means are available for averting bankruptcy.

Still, if such an option is unavailable, the similarities between pre-bankruptcy Vallejo and Santa Ana today are hard to ignore. Both got to the edge of insolvency through reckless government spending, with salaries and benefits for public safety personnel burning through over 70% of the general fund. And if the experience of Vallejo is any guide, tough times are likely ahead for Santa Ana. With the collapse of the East Bay's housing market and the closure of the Mare Island Naval shipyard (Vallejo's largest employer), what was once a solidly middle-class community near the Napa Valley quickly became a very troubled town. In the wake of the bankruptcy, sharp cuts to police and fire services have left it much more dangerous and unpleasant. Unfortunately, Santa Ana might weather such cuts very poorly; aside from being a heavily immigrant community with significant poverty, it's also one of the most densely populated cities in the United States.