Faced with the prospect of becoming the biggest municipal bankruptcy in U.S. history, in February, the city of Stockton, Calif., decided on a novel gambit. To avoid going “bankrupt,” they’d simply stop paying some of their bills, leaving more money to pay their other bills.
Specifically, Stockton’s City Council decided to skip a $779,935 payment to Wells Fargo (WFC), owed as an installment on $32.8 million worth of bonds issued to finance the construction of two downtown parking garages. So problem solved, right? No?
Oh, well. It was worth a try.
Hey! Who Stuck This Boot on My Parking Garage?
There was just one problem with Stockton’s plan. The garages themselves, and the income generated from them, secured the city’s duty to make payment on the bonds.
So when Stockton reneged on its obligation to pay, Wells Fargo took ’em to court… and won. The Superior Court of San Joaquin County ruled last week that Wells Fargo could repossess the garages and attach the parking revenues as payment on the bonds.
In essence, Wells Fargo issued Stockton a parking ticket, and booted its garages pending payment.
Needless to say, Stockton’s not thrilled with this result, and says foreclosing on the garages is not a “permissible remedy” under California law. And yet it just happened, and a California judge OK’d it.
What It Means to You
It’s tempting to dismiss all this with a simple “Serves them right, those crazy, spendthrift Californians.” But if you’re a resident of a U.S. town or city — and according to the government, 82% of us live in urban areas — then Stockton’s misfortune holds a lesson for all of us:
Debts, once incurred, must be repaid. And bankers will insist on getting paid.
Stockton got itself in this mess through massive spending during the housing boom, on everything from baseball stadiums to parking garages to overgenerous pension benefits for public employees. But Stockton’s not alone. Just in California, the 24 biggest municipal pension plans are underfunded by a collective $136 billion — half the level they need to be to pay on the promises they’ve made. Attempts to rob Peter to pay Paul (or rob Wells Fargo to pay Paul the retired policeman) are going to cause increasing amounts of pain in the months and years to come.
Stockton’s impending bankruptcy may become the biggest in U.S. history. It won’t be the last.
Motley Fool contributor Rich Smith does not own shares of any companies named above, but The Motley Fool owns shares of and has created a covered strangle position in Wells Fargo, and Motley Fool newsletter services have recommended buying shares of Wells Fargo.