UPDATE 1-California treasurer aims to help cities avoid bankruptcy

Fri Aug 17, 2012 8:21pm EDT

Aug 17 (Reuters) - California's treasurer is exploring creating a new system to identify fiscally stressed cities and help them avoid default or bankruptcy, his spokesman said on Friday.

Since June, three California cities have sought bankruptcy protection and a Wall Street rating agency warned that more municipalities in the state could file for bankruptcy. Moody's Investors Service said it might cut the ratings of fiscally stressed California cities after it finishes reviews that will be conducted in the coming weeks.

"Recent developments definitely merit concern," said Tom Dresslar, spokesman for Treasurer Bill Lockyer, by email.

However, noting that California has 482 cities, he added: "Moody's and others should think twice before jumping to the conclusion there's a significant new risk of cities rushing into bankruptcy to stiff bondholders."

Many counties, cities and towns around the nation share the same fiscal problems as California's localities: soaring pension and health benefits and faltering property tax revenue because the housing market remains below its bubble-era highs.

California has become the nation's hot spot for municipal bankruptcies, partly because it limits the ability of localities to raise taxes and sell general obligations. The crash of its housing market was more severe than in other states.

But while other states, such as New York and Pennsylvania, try to prevent municipal bankruptcies, California in 2011 enacted a law that allows Chapter 9 filings after 60 days of mediation talks with creditors.

California's policy of "home rule," which gives localities considerable freedom from state interference is seen as a major obstacle in devising an anti-default and anti-bankruptcy plan.

"This effort needs to be thoughtful and deliberate; we can't just rush willy nilly into some system," said Dresslar.

The new system would use a number of data points - which have yet to be determined - to assess the fiscal health of a locality. Lockyer is looking at the approaches other states use.

Any new system for California would not be ready this year, Dresslar said, noting the governor, the controller, the Department of Finance, and the legislature would all likely have to be involved.

A separate initiative by the California controller, John Chiang, to help localities before their financial problems become overwhelming is further along.

The measure now is being considered by the Assembly appropriations committee. It was passed by the senate in June 2011.

The bill would allow the controller to preliminarily review a city's finances "if there is a valid reason to suspect problems in their accounting," a spokesman for Chiang said.

A full audit would follow if problems were uncovered.

Currently, localities are audited by outside accountants every year but the controller can only step in after a series of accounting problems have been documented.

Further, the bill would allow a city to request that a financial review committee be created to devise a recovery plan. But its powers would be purely advisory, the spokesman said.

If the committee and then the Assembly approve the bill without making changes, it would be sent to Governor Jerry Brown for his signature, the spokesman said.

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