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Moody’s Predicts More Financial Trouble in Calif.

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    FBN’s Liz MacDonald on the continued financial struggles in the Golden State.

  • Duration 5:05
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One of the nation's top credit rating agencies Moody's is reporting that a growing number of California's cities are experiencing serious fiscal distress.

Dot.

Joining me now heightened flu what could make huddle with Morgan that's not live with the stories about its I had they're predicting greater but is their bright side on this list.

There's I think the reality check it's really bounced on the story and yeah we know that three -- -- in a file for bankruptcy that being San Bernardino.

Stockton mammoth falls.

What we're talking about first of all.

Where -- the hotspots where -- where spots in California east of LA of course and in the middle of the state and possibly Compton.

California -- yet to think it is -- and it money by the end of the summer.

Up what what let's do let's step back and talk about why the reality check has bounced on what on this story it's -- it by the way.

There was that prediction hundreds of billions of dollars having been in municipal defaults will for that to happen at taking the majority of the country's governments have to collapse.

So let's step back from that when people say it -- Citi Citi F file for bankruptcy.

What they're doing is they want to cut the interest rate.

That's it.

And when they do go bankrupt the end up outsourcing their police or fire departments to neighboring cities like Needham -- did with bell but both collapse that they -- hope for example hasn't issued -- since 2004.

They've outsource their police department to the LA sheriff's office so things are still up and running in cities that do this -- cities don't wanna do -- because -- California.

What are they gonna do bar from Sacramento -- Sacramento has its own fiscal crisis.

Utility locked out of the Muni market and so they know that and so what we're seeing is.

There were 43 municipalities have filed for bankruptcy across the country since 1981.

The majority tried to cut the interest rate as there they had did may have want to cut the interest rate they don't wanna -- the principal -- -- the interest rate -- to the debtors.

So and that was union bank by the way so since 81 -- 43 cities that have filed cities that have filed.

-- 33 were dismissed by -- judge.

So when you look back and the reality here also loading these statistics and what Moody's is looking at two.

Is that school districts hospitals and colleges also were and it can inflate these numbers we -- -- to be in the bond market right -- mart and they get to bar tax exempt so.

I'm saying just no -- it you know people -- -- -- my god -- cities going bankrupt in California loaded in those numbers are of those colleges universities and and local schools and so you know.

I would say caution here on this story.

There's going to be a lot of hysteria about it.

But -- would and by the way -- citing JPMorgan research and data to mortgages and -- Goldman -- -- so you know.

Isn't bad yes but like is -- -- political reality yes if you look at.

Categories of municipal bond mutual funds this year your -- -- high yield Munis are your best performing but of all the other categories.

You have California long municipal bonds that is your best performing category and that's my really interest and I yield Munis so at least some of that is.

-- related to interest rates some of that is related to the duration of the bonds because the longer bonds have done well but again if people are willing to take on California -- -- also what -- it.

It says something about.

A fund managers and not worry about widespread defaults and.

Yep because they know that they -- has -- a story is you know kind of government at a Sacramento with a tin cup when those -- doesn't have the money gonna have to always use the the credit markets cannot say year to date credit JPMorgan Chase and knock out administrative errors and -- -- according JPMorgan.

The total and California that has defaulted here today.

There -- 33 issuers 550.

Million this is a three point seven trillion dollar total so and then we're talking hundreds of millions and -- multi trillion dollar mark.

Also a re in it -- staying.

Which is turning into a court fight related to Stockton because.

We always talk about the need to renegotiate these pension obligations of these health care obligate yeah.

Com for these.

For these municipalities.

And -- bond holders were angry that the bondholders.

Won't get.

The short end of the stick -- the stock to bankruptcy but the city I'm calpers put the kibosh on them written negotiate -- negotiate I have -- -- -- -- obligate right.

So it's like you think it these bankruptcies might work to -- you know work to clear away some of these pension obligations and so far it in the case the stock at an -- Yeah that's right when you have a big behemoth a big gorilla like calpers sitting in stepping in and on the other side of the courtroom from your.

Yet I mean -- the what you're saying -- essentially it's by it's going to be in the courts for awhile.

So that tells you again you don't really wanna file for bankruptcy right and for example let's he has been -- -- -- that's at San Francisco the legal fees ten million and counting something hundreds of millions expected.

Just for being held -- that's still sort of -- -- not they know again.

Is a case in point they did and they are still running as a city -- the streets need to be paid industry to run -- -- with potholes.

But they did outsource a lot of their municipal.

Oversight and police and fire department.

Duties other cities in the area so that's how it's -- that's -- the landing and that's that's gonna chick I think -- same here I day it was McDonald all of of that store.

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