Economic Folk | Business News, Real Estate and Stock Market: Dissolving Cities

Some cities in California are so bloated in debt and other problems they are considering dissolution. Mercury News asks is this The End of Half Moon Bay?

Between budget losses and lawsuit payments, Half Moon Bay's financials have become so dire that if a local sales tax measure doesn't pass this November, officials say they may have to disincorporate.

City leaders have been using the "D" word for a few weeks now as they try to persuade voters to pass Measure K, a one-cent sales tax increase that would help the city balance its budget with an extra infusion of $1.4 million per year for the next seven years.

Dissolving Half Moon Bay -- handing the city's budget, operations and services to San Mateo County -- would be an absolute last resort, but the city may not have many other options left, City Councilman John Muller said.

At first glance, disincorporation could save taxpayers some money: no more city administration to support. Police services would be contracted out, and the county would cover planning, building and public works projects from its offices in Redwood City.

City Manager Michael Dolder admits disincorporation is one of the options on the table now. The City Council already cut $900,000 from the current budget -- including half its employees -- and imposed furloughs on those who remain. Some of the cuts were needed to pay for the Beachwood lawsuit settlement, a $15 million burden the city will shoulder in bond payments for the next 20 years.

Disincorporation is so rare in California that it's almost without precedent. The last city to do it, Cabazon in Riverside County, had fewer than 2,000 residents and no functional government to speak of when it voted to give up cityhood.

The process is so complicated that county officials said they don't know what kinds of services the Board of Supervisors would choose to provide or how much they would cost.

One thing is certain: disincorporation is not a bailout. The county would lay claim to revenues, including Half Moon Bay's property taxes, sales taxes and hotel taxes, but not its liabilities. Today's Half Moon Bay residents would be required to assume the debt burden of Beachwood bond payments, which would likely be added as a lien on their properties, according to Assistant County Controller Bob Adler.

D Is for Disincorporate

The PropZero blog writes California Cities: D Is for Disincorporate

City officials in Half Moon Bay say the municipal budget is such a mess that it may make sense to disincorporate and turn the place over to San Mateo County

Consider Los Angeles County which has 88 cities, many of which it clearly does not need. Several of the smaller cities seem to exist as personal playgrounds for families or particular businesses. Those municipalities -- the now famous Bell just one of them -- have extensive histories of municipal corruption. If such cities were to go away, would they be missed?

A side note: unions have revived legislation in Sacramento that seeks to prevent cash-strapped cities from declaring bankruptcy (Municipalities would have to get permission from a labor-dominated commission first). The consequence of that legislation, were it to pass, might well be to promote more disincorporations -- that is, the shutting down of cities -- since bankruptcy would be all but off the table.

Simple Solution

Unions have revived measures to prevent municipal bankruptcies, but hopefully the governor would veto such asinine legislation were it to actually pass. I doubt there would be enough votes to override the veto.

The problem with disincorporation straight up is that it leaves the debts intact.

Instead, I propose Half Moon Bay file bankruptcy, wiping out its debts, or at least sending them to bankruptcy court. Then Half Moon Bay can disincorporate, saving itself the problems of dealing with a local police force and its pensions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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