Petek Says Bankruptcies Belie Californians’ Willingness to Pay
California and its local governments have reduced payrolls by 8.1 percent since employment peaked in June 2008, compared with the national average drop of 3.2 percent.
The decline indicates to Gabriel Petek, senior director at Standard & Poor’s in San Francisco, that Californians are serious about meeting their obligations even with three municipalities seeking bankruptcy protection since June.
Petek, 40, S&P’s primary analyst for the state, was interviewed by e-mail for today’s Bloomberg Brief: Municipal Market newsletter. He discussed the chances that Governor Jerry Brown’s proposed temporary tax increases will be approved; cities’ ability to repay their debt; and whether individuals are leaving for states where levies are lower.
Q: There have been three Chapter 9 bankruptcies in California in 2012. How many more might we see for the remainder of this year and in 2013?
A: We do not anticipate a widespread wave of additional Chapter 9 petitions among California cities. That doesn’t mean there will be zero, however. And keep in mind we rate 201 cities out of 482 in the state. I cannot express an opinion about the unrated cities. We think that the ones at greatest risk are already among our lower-rated ones. One potential caveat relates to disclosure. To the extent cities restate previously issued financial audits revealing materially weaker fiscal positions, as we have seen in a couple of cases, more significant rating actions or other indicators of distress cannot be ruled out.
Q: Should investors be concerned about California cities’ willingness to repay their debt?
A: We think cities’ willingness remains strong. California cities have less revenue raising flexibility. As a result, much of their budget management, which preserves debt-paying capacity, takes place on the spending side. Since peaking in June 2008, California state and local governments have reduced payrolls by 8.1 percent. Nationally, state and local governments have reduced payrolls from their peak levels by 3.2 percent. Since personnel costs frequently equal 70 percent or more of government budgets, this tells me they are willing to take difficult actions on behalf of their finances.
Q: What’s your best guess on whether California voters will support the Brown tax increases?
A: We don’t have a position on whether voters will pass or reject Proposition 30. The most recent public polling data shows it running pretty close to the 50 percent margin necessary for passage. The budget law that wound up being enacted assumes passage of Prop. 30, which for several years would assist the state’s fiscal position while helping it reverse some of its payment deferrals. While the budget law also included offsetting trigger cuts if the measure goes down, they don’t entirely compensate for the missing revenue -- and are left with a $2.5 billion gap. Also, if other budget provisions fall short of assumptions, the measure becomes a more important linchpin to the state’s overall fiscal picture. Suffice to say, we are watching it closely.
Q: Has there been an increase of taxpayers leaving the state?
A: While California has a relatively higher marginal income tax rate and high sales tax rate, the real level of taxation in the state economy is more ambiguous. We examined this issue back in June and found that for 2012, the three main state tax revenues -- personal income, sales and use and corporate taxes - - were on track to yield revenue equal to an estimated 4.84 percent of total personal income in the state. This is lower than any other year since 1971. While there is an intuitive appeal to the notion that higher tax rates could cause outmigration, we haven’t seen enough academic research to support that.
Q: Is there any indication that the intense distress cities are facing from high salaries, benefits and pension costs is more than a California-specific problem?
A: A more exaggerated boom-and-bust in the housing market converged with limited revenue raising flexibility among California cities to facilitate distress in some cases, but it really comes back to management. Cities that negotiated away varying amounts of discretion over key spending decisions set up what amounts to almost passive fiscal structures. The arrangement may have been affordable so long as revenues continued to grow. But if revenues, which had grown at extraordinary rates during the housing boom, stalled or declined, and the city was contractually unable to make spending cuts, it was fiscally handcuffed.
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