Another Chapter 9 Bankruptcy in California Could Be Coming

A Chapter 9 bankruptcy in California is a type of bankruptcy available to towns, cities, counties, and other municipalities. Stockton California has just exited their chapter 9 bankruptcy in the summer of 2017, and Orange County set a record for one of the largest chapter 9 bankruptcies of all time in 1994 with over $2 billion in city debt. So while California is not a stranger to these special types of bankruptcies, it is still a shock to hear the Moraga, California, a small San Francisco suburb with 17,000 residents is facing the same financial pressures. In June 28^th Moraga declared a fiscal emergency which is the first step in a California bankruptcy case for chapter 9.

When a city in California declares a fiscal emergency, the town’s leadership is afforded new power to appoint news fees in an effort to increase revenue. For those of you familiar with Moraga, CA, you know that it is a fairly affluent community where the median family income is over $150,000 per year. At first glance, this would appear to be an excellent tax base in order to keep the local government running. However, due to measures enacted all the way back in 1978, homeowner’s tax bills cannot be increased by more than 2% each year, which makes their property based tax revenues far less than what they could be without this form of control.

Moraga’s financial woes can be blamed on two massive public works programs that have drained its cash reserves: repairs to a damaged bridge in April 2017, in addition to, repairing the damage caused by a massive sink hole. Officials have stated they hope that the state and federal government will reimburse the city for fixing these problems, but in the meantime the costs have decimated the city’s savings accounts. Now the city is left with two options: impose new fees on Moraga residents or cut services in an effort to avoid a Chapter 9 bankruptcy.