Cambridge J Regions Econ Soc 2014 Davidson 81 97

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Cambridge Journal of Regions, Economy and Society 2014, 7, 8197doi:10.1093/cjres/rst030Advance Access publication 26 December 2013

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Picking up the pieces: austerity urbanism, Californiaand fiscal crisis

Mark Davidsonaand Kevin Wardb

aDepartment of Geography, Clark University, 950 Main Street, Worcester, MA 01610, USA,[email protected] of Environment, Education and Development, The University of Manchester,Manchester M13 9PL, UK, [email protected]

Received on May 13, 2013; accepted on October 23, 2013

California continues to be at the epicentre of the current Great Recession. Cities around thestate are facing a multiple-fronted assault on their fiscal situation. Although not newthestates precarious financial situation is the stuff of legendsthe cutting in federal revenues,together with the decline in property taxes stemming from the drop in house prices and therising costs of servicing debt incurred through years of speculative growth strategies have lefta number of city governments in the state horribly exposed. This paper explores the placeof a number of Californian cities in the context of the wider onset of US austerity urbanism.This constitutes a deepening and widening of some aspects of earlier neo-liberalisation.

Keywords:austerity urbanism, California, crisis, finance, redevelopment

JEL Classifications:R38, R58

Introduction

the austerity war is now raging. States arecutting funds for programmes such as healthcare for the poor, home care for the infirm, andsupport for education at the elementary, highschool and college levels (Crotty, 2012, 97)

California is in a state of permanent crisis(Bardhan and Walker, 2011, 317)

[San Bernardino] is a living laboratory forhow a Chapter 9 municipal bankruptcyworks in California (MacDuff, 2013, np)

What happens in Stockton will be a bell-wether for other cities that are in financial

distress Stockton has already taken thecenter stage in a long line of cities in crisisEveryone is following it because it does have

implications for how the game gets played

beyond Stockton(Smith, 2013, np, emphasisadded)

The title of this paper paraphrases Steve Duran,the Hercules city manager. Located north eastof San Francisco, this city of just under 30,000has been left with an annual debt repaymentof $20 million with the winding down of itsRedevelopment Agency (RDA). The city wasalready struggling financially, due to federalbudget cuts and a sharp decline in the valueof its housing stock and thus in its property
mailto:[email protected]?subject=mailto:[email protected]?subject=mailto:[email protected]?subject=mailto:[email protected]?subject=


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tax base. Its general fund had dwindled from$18 to $10.5 million over the last few years, forexample. The statewide closure of 425 RDAson 1 February 2012 by Governor Jerry Brown

only made matters worse, and led the city ofHercules to lay off one hundred of its workers,about 40% of its total workforce. The city hasalso had to generate various reports to docu-ment how it has spent the revenue generatedby the RDA, as the state has sought to claimunspent funds and those who had providedfinancial guarantees for the Agencys bondshave sought repayment reassurances. Theserevealed, amongst other things, that in April2012 the RDA sold a four-storey apartment for

$425,000, having spent over $38 million on itover the years, while it also had to cease a $20million youth stadium project when the dropin property values meant that the project wasno longer financially viable. More generally,the State Controller, John Chiang, commentedthat During my time in office, this could bethe worst set of city accounting records I haveseen. The Citys books were so poorly managed,that I must question their use of every singlefederal and state dollar granted to the City.

In the context of a wider regime of light touchaccounting and record keeping this is someclaim! As of late 2013 Hercules hovers on thebrink of bankruptcy, seeking out new ways ofdelivering basic services while managing therepayment of various general fund and redevel-opment bonds. The RDA successor agency, thatis the city government of Hercules, meanwhilestruggles to manage the legacy of bad debts andprojects bequeathed to it.

Hercules is not alone, of course. Other cities,

including, Lincoln, Milpitas, San Bernardino,Stockton and Vallejo are at various stages offiscal distress. Table 1 outlines some generalcharacteristics of these cities and their currentprecarious situation.

Each has either filed for bankruptcythrough Chapter 9or is actively pursuing aus-terity strategies just short of bankruptcy. Whilethere are elements of mismanagement in each

case, there are also strong shared systemic fea-tures. Post Proposition 13 many Californian cit-ies used RDAs to speculate on future growth.Speculative urbanism was system wide. Large

amounts of money were borrowed againstfuture revenue streams. Bonds were issuedagainst these streams, to add to the GeneralObligation Bonds. Consequently, these citiesfound themselves with unserviceable levels ofdebt when the 2008 financial crisis struck andthe decision was made to close down RDAs in2012. There is evidence to suggest they are notalone in either California (California PublicPolicy Center, 2013;Walters, 2013) or the rest ofthe USA (Hujer, 2013; Plummer, 2013).

Figure 1reveals that Californias RDAs hadgenerated over $30 billion of debt when theywere closed down on 1 February 2012.

While this was the end of the RDAs inCalifornia, it was not the end of their conse-quences. Organisationally, cities and countiescontinue to wrestle with the succession plans.In most cases the debts, liabilities and projectsof RDAs were taken over by city governments.Not in all cases however. Los Angeles was anoticeable exception. The city government

declined the offer from Governor Jerry Brown,with the LAs City Administrative Officer,Miguel Santana, claiming that we cant affordit (Zahniser and Garrison, 2012, np). Insteadthe RDAs 192 employees were laid off and aDesignated Local Authority was appointed.Moreover, around the state the disentan-gling of RDAs from the various financial andlegal arrangements and entanglements theyhad with other city, county, state, federal andinternational private and public economic and

financial actors is likely to continue to exercisemany stakeholders for the next decade or so.Financially, the fallout of their cessation alsocontinues to reverberate around California.The States financial team has gone from cityto city auditing the books of the RDAs, look-ing for revenue it can claw back to offset itsown precarious financial situation. For despiteannouncing a balanced budget for 20132014


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Austerity urbanism, California and fiscal crisis

Table1.

Thestartofthegre

atCaliforniamunibankruptcyrun?

He

rcules

Lincoln

Milpitas

SanBerna

rdino

Stockton

Vallejo

Population

26,000

43,428

66,790

213,012

290,000

116,829

Medianhousehold

income($)(US

medianis51,017)

87,869

60,883

92,964

61,632

47,946

61,6

32

Budgetdeficit($)

1m

illion

2million

5.2million

2232million

2038million

16m

illion

Percentbudgetfor

salaries&benefits

5060%

83%

84%

75%

82%

78%

Percentmedian

homevaluedecline

62%

50%

33%

55%

65%

66%

Maindeficitdrivers

Citygovernment

tookon$20mil-

lio

ndebtfrom

redevelopment

agency

Newlibrarycre-

ated$16million

deficit

Citygovernment

tookon$39mil-

liondebtfrom

redevelopment

agency

Closureof

redevelop-

mentagen

cy,

generating

loss

ingeneral

oper-

atingincome

Lost$2.3million

inpropertytaxes

andretireecosts

increasedfrom

$8.5to$16.8mil-

lionover3years

Los

t$4.9million

inrevenuesand

$5.2

million

incr

easeincom-

pen

sationrelated

exp

endituresin

200

8

Deficitreduction

strategies

Re

duce40%o

f

citygovernment

em

ployees

Consultanthired

toreducecosts

Declarefiscal

emergencyprior

topolltoraise

taxesorfilefor

bankruptcy

Enterinto

bankruptc

y

Enterinto

bankruptcy

Ent

erinto

ban

kruptcy

Source:AdaptedfromLusva

rdi(2012).


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(Luhby, 2013), California continues to be fis-cally dysfunctional (Bardhan and Walker, 2011,317). Indeed, according to Oliff et al. (2012,5),Californias shortfall is 16.2% of its 2013 finan-cial year budget, or $15 billion and hence whyemptying the accounts of the states 400-plus

RDAs was attractive to Governor Jerry Brown.This paper explores the current plight of a

number of Californian cities in the context ofthe systemic emergence of speculative urban-ism as the modus operandisince the early 1980s.Our argument is two-fold. First, that the lastfour decades have seen US city governments ingeneral become ever more entrepreneurial andinnovative with regard to economic develop-ment (Harvey, 1989). Cities have had to indulgein ever more risky forms of speculative urban-

ism,understood here as the ways in which cit-ies speculate on future economic growth byborrowing against predicted future revenuestreams to make this growth more likely. Theythus seek to make a particular future realizableby borrowing against it. This has occurred in thecontext of the broader emergence and exten-sion of neo-liberal urbanism. This emphasisedan always-contradictory process [of]

evolving/rolling programme of restructuring(Peck and Theodore, 2012, 179).

Our second argument is, however, that as thewave of recent bankruptcies reveal, Californian

cities were at the forefront of this speculativeurbanism. Afforded very little fiscal wiggleroom due to the introduction of Proposition 13in 1978which capped local property taxesand required a two-third of vote of the legisla-ture or the citizenry to increase taxes (Bardhanand Walker, 2011, 316)it was herethroughthe ardent stimulation of development andconsumption, oftentimes via the use of RDAsand Tax Increment Financing (TIF)that cit-ies speculated on future growth, borrowing

against possible but not guaranteed future rev-enue streams (Weber, 2002, 2010). As a conse-quence, cities were gambling on, and eventuallybecame habituated to, endless growth (or atleast growth for 2025 years, which is the lengthof the bonds that were taken out to instigateeconomic development). As the last 5 yearshave demonstrated this over-reaching has comeat a high cost.

The next section of this paper turns to outlinethe general contours of speculative urbanism,

paying particular attention to the increasing useby cities of revenue bondsthose not backedby the full faith and credit of a municipalitystax base (Hackworth, 2002). The third sectionturns to the example of California. We outlinethe ways in which the states city governmentsspeculated on future growth, using consequentrevenues to fund a number of schemes. Somebankrolled redevelopment projects which metthe statewide blight and but for criteria. Thatis, but for the redevelopment project the prop-

erty taxes would not rise, there would be noincrement that could then be captured, partlyused to pay down the bond and partly usedto finance other schemes. Revenues were alsoused to other ends, which did not comply withthe statewide legislation.

Put simply, in an age where the scope forCalifornian cities to increase revenues wasincreasingly constrained, they turned to

Figure 1. The long-term debt of Californias redevelop-ment agencies.


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speculative mechanisms in order to generatefunds for both local services and discretionaryspending. In some cases this included payingfor services that might normally have been

expected to have been covered by the generaltax base, such as the pensions and salaries ofpublic employees. The final section of the paperexamines institutional and financial restructur-ing in Vallejo, California, as an exemplar oftodays speculative urbanism under conditionsof austerity. In conclusion the paper makesthree arguments. First, municipal bankruptciesin California are redefining the stakes of USurban politics, creating a political landscapewhere just the threat of going broke can be

used to impose draconian neo-liberal reforms.Second, as the federally mediated urban cri-sis rolls out, city services and operations oncethought beyond the reach of neo-liberalisationare now becoming fair game. Third, after yearsof speculative urbanism a number of citiesappear ill-prepared financially to deal with thecurrent urban (fiscal) crisis.

Entrepreneurial speculativeurbanism

Just for a moment it looked like neo-liberalurbanism would be no more. The free mar-ket project is on the ropes declared Peck et al.(2009a, 94). The financial crisis that struck firsttowards the end of 2007 appeared to signal theend of the belief that open, competitive andunregulated markets, liberated from state inter-ference and the actions of social collectivities,represent the optimal mechanism for socioeco-nomic development (Peck et al., 2009b, 50). Yet

this moment was relatively short lived. Talk ofalternatives proved to be just that: talk. Quicklyneo-liberal business as usual was restored. Overthe last 5 years what has been witnessed acrossthe cities of the global north is nothing shortof extreme austerity urbanism (Gray, 2012;Mayer, 2013; Peck, 2012), or what Peck (2012,631) refers to as the urbanisation of neoliberalausterity. This has involved state and local

governments and cities in particular beingexposed to the full force of austeritys extremeeconomy (Peck, 2012, 628). Echoing the argu-ment of Peck et al. (2009b, 57, original emphasis)

that cities have become strategically impor-tant arenas in which neo-liberalising forms ofcreative destruction have been unfolding, ourargument is that the speculative component ofthis neo-liberalising of cities left many of themhorribly exposed to the vagaries of the financialand housing markets. This exposurewhichallowed cities a degree of financial flexibility,as they took risks with as yet unrealised rev-enue streamscan be summarised along fourrestructuringfeatures of entrepreneurial specu-

lative urbanism. These general tendencies arejust that, general. They are not constituted orexpressed uniformly across space but are rathermediated across a range of geographical scalesthrough various institutional and organisationalprisms. However, their defining and DNA-likecharacteristics can be summarised as follows:

Restructuring of inter-governmental relations:In this the federal level has downloaded a num-ber of responsibilities, governing at a distancethrough the establishment of various indicators,

at the same time as the limited federal and statelevel monies were used to incentivise partner-ships with the private sector. This has meant anumber of cities have become more dependenton own-source revenues (Weber, 2002, 190).

Restructuring of the logics of governmen-

tal decision-making: In this, many cities havedeveloped more speculative mechanisms tofinance current expenditure through borrow-ing against predicted future income revenues.In the process this has changed the calculations,

logics and rationalities of city government andother private and public actors involved.Restructuring of public finance: In this the

federal support for local activities and servicesas part of a wider commitment to redistributionhas been dismantledslowly and unevenlyacross spacewith localities establishing newmechanisms for generating and retaining cur-rent and predicted revenue streams.


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Restructuring of risk allocation: In this, therisk and its associated management has beendownloaded to localities, with the withdrawalof a federal safety net exposing localities to a

range of forces and pressures.The outcome of these general tendencies

has been that a number of US cities have beenleft teetering on the brink of financial crisis(Plummer, 2013). Unevenness in capacitywhich has always been present in the countrysfederalised fiscal systemhas been renderedmore pronounced, as those cities that have facedthe greatest pressure to downsize their work-force are also those that face the greatest chal-lenges in terms of populations disadvantaged by

the fiscal crisis. Some cities have even gone as faras to file for bankruptcy. These include CentralFalls, Rhode Island, Harrisburg, Pennsylvania,Jefferson County, Alabama, and more recentlyand perhaps infamously, the city of Detroit.However, California has seen the most bank-ruptcy filings, is the state with the second worstcredit rating in the nation and is where the debtalmost trebled in the 6 years prior to the finan-cial crisis (Summers and Randazzo, 2008). It isto this state that the paper now turns.

Contours of Californian speculativeurbanism

Luck, now, as well as idleness or inadequacy,can lose you a job. Luck can wipe out a life-times savings, can double or halve the costof a holiday abroad, can bankrupt a businessbecause of some unpredictable change ininterest rates or commodity prices or some

other factor that used to be regarded as moreor less stable and reliable (Strange, 1986, 2)

Investors beware. Armageddon for munibond holder lies ahead, and it could hit youlike an iceberg (Zamansky, 2013, np)

The mantras of free and unfettered markets andthe small state became engrained in Californiastate and municipal politics from the late 1970s

onwards (Lustig, 2010). To a large extent, theneo-liberal reforms imposed in California mir-ror those in other places (Bardhan and Walker,2011). Cities became less reliant on funds redis-

tributed from federal and state governmentsand, consequently, had to devise revenue gen-erating mechanisms themselves (Harvey, 1989).As responsibilities were downloaded fromfederal and state levels, cities were required tofund more local services and to find innovativeways of supporting their vulnerable communi-ties (Peck and Tickell, 2002). In this section webriefly describe the contours of this neo-liberal-ised urban governance landscape, outlining theconditions that led to a number of Californian

cities becoming avid gamblers and speculators.

Revenues

Since Reagans federal reforms in the 1980s(some of the impulse for which came from theCalifornian Proposition 13 reforms in the late1970s), federal government transfers to munici-palities have halved (Wildasin, 2010) and manystates have sought to do no more than maintainfunding levels, generating significant gaps in

city budgets. In California this reliance on statefunding was made more severe by the passingof Proposition 13 in 1978. The capping of gen-eral purpose property tax rates at 1% and therequirement for two-thirds of the voting citi-zenry or legislature to increase property taxeseffectively took away from city government oneof its most important ways of increasing reve-nue. The effects were immediate. State revenueswere cut by 57% in 1979, leading to 100,000 pub-lic sector layoffs (Keil, 1998; Goldberg, 2010).

Coupled with declining federal resources, cit-ies around the state were faced with a systemicfiscal crisis, and began to explore other waysof generating revenues (Bardhan and Walker,2011). Pay as you use replaced pay as you go,as cities turned increasingly to the capital mar-kets (Kirkpatrick and Smith, 2011), to the pointthat some have recently claimed that the stateis drowning in debt (Summers and Randazzo,


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2008). Subsequent revenue-restricting reformsat the state level have meant Californian citieshave been impelled to pursue revenue-raisingactivities in order both to meet the most basic

needs of its communities and to pursue relatedeconomic development strategies. The latterinclude, for example, the granting of franchiserights, permits and local sales taxes to producenew and/or enhanced revenue streams. Manyof these revenue streams are tied to levels ofconsumption, making them particularly sensi-tive to economic cycles.

The two revenue sources that became widelyused across the state and that were tied to thedevelopment-focused speculative actions of

municipalities were RDAs, their use of TIF andtheir circumventing of any increase in prop-erty taxes that would need to be agreed by atwo-thirds voting majority. However, as ourstudy of Vallejos bankruptcy illustrates, theseinstitutionalised development mechanisms,and their particular uses, were derivative of aspeculation-driven form of urban governance;as opposed to them alone encouraging specula-tive forms of governance.

RDAs grew out of the post-Second World

War federal urban renewal program. The aimof the post-Second World War CommunityRedevelopment Act (1945) was to give stateagencies the ability to address urban blightby offering state assistance and government-backed financial incentives to stimulate devel-opment. In 1951 the state voted to allow TIF.This was unique at the time to California,although it has subsequently been introducedinto every US state bar Arizona. This allowedan RDA to designate an area as blighted,

using eminent domain if required. It couldthen speculate on what extra or incrementalproperty taxes and sales taxes could be gener-ated if it spent some money up-front on vari-ous types of infrastructure. This could includebrownfield clean-up, land purchase, new roads,new sewerage systems for example. The up-front expenditure would be financed througha bond issue, not against the general fund but

rather against the projected incremental futurerevenue stream that would be generated postthe investment. One consequence of TIF was,however, that special districts, such as schools,

which received a proportion of local propertytaxes, did not receive a proportion of the incre-ment for the duration of the TIF, which wouldoften be between 20 and 25 years (see Figure 2)

While Californias cities were able to use(and where deemed necessary, increase) localproperty taxes to support the delivery of eve-ryday services there was little use of TIF in thestate, and very few RDAs were established. Forexample in 1977the year before Proposition13 was passedthere were only a couple of

hundred RDAs and they received less than 2%of statewide property taxes. Ten years later in1988 the number of RDAs had doubled andthey were receiving approximately 6% of state-wide property taxes. By 199820 years afterProposition 138% of all statewide propertytaxes were being collected not by city govern-ments but by the 400 or so RDAs. Unable toincrease local property taxes, for many citiesRDAs and TIF was the only economic devel-opment game in town. It was certainly the one

over which there was the least political or pub-lic accountability and oversight. The kinds ofprojects that RDAs undertook also changedover the decades. Definitions of blight becamestretched in the state, reflecting a US-wideredefinition of the term (Weber, 2002), as inmany cases the RDAs turned their attentionaway from downtown and out to the suburbs.The projects also grew in size, as city govern-ments worked in tandem with their RDAs tomax-out on development and the revenue

streams it promised.In practice, then, RDAs played the simplebut not uncontroversialrole of providingcheap funding to property developers in orderto direct development into designated districts.Using eminent domain powers, they becamesignificant political actors, kick-starting eco-nomic development by issuing bonds againstpredicted future revenue streams and using this


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capital to encourage and financially incentiv-ise developers and others with a stake in thisparticular model of growth. The revalorisationof commercial and residential project areasvia RDAs had a central role in making cit-

ies function in times of reduced redistributedfunds. By reinvigorating urban districts the citycould restore and/or increase property valuesand occupancy levels, therefore boosting totalproperty tax revenues. Furthermore, a success-ful RDA could use funds accrued through rev-enue-raising project for the production of yetmore (re)development.

The success of many RDAsalthough notall were successful (Jonas and McCarthy, 2009;Kirkpatrick and Smith, 2011)led them to

become central contributors to city budgets.They subsidised activities and services thatcould not be funded out of the general taxbase. In Oaklandthe city over which the nowGovernor Jerry Brown presided between 1999and 2007for example, RDA income was fun-nelled into central city funds in order to sup-port, by 2012, the salaries of approximately200 employees, including those in the mayors

office and public works (Lee, 2012). The specu-lative activities of RDAs therefore became animportant and normalised aspect to Californianmunicipal governance, as did the generation ofdebtin the form of issued revenue bonds

which required a buoyant economy in orderto generate the increment which would allowthem to be paid down.

This redevelopment-led revenue raising waspaired with a more general reliance on prop-erty tax revenues. With Proposition 13 limit-ing any raises in property taxes to 1% of thevalue of properties, many cities were left withlittle option but to produce more (sub)urbandevelopment in order to increase the propertytax base and collect construction-related rev-

enues (for example, permit fees). In the contextof Californias economic boom, this strategyproved effective in many cities. As demandfor housing grew, particularly in and aroundthe states largest cities, the Californian econ-omy supported more and more employment(OKeefe, 2004) and property prices inflatedto staggering levels (Glaeser et al., 2005), ascities were able to collect growing amounts

Figure 2. Tax increment financing.


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of property related revenues. The speculativehousing boom in California therefore proppedup municipal government and, as such,Californian municipalities had little interest in

putting the brakes on property developmentand/or house price inflation (Goldberg, 2010).

Expenditures

In the post-crisis period, the expenditures ofindebted Californian municipalities have comeunder much scrutiny, both inside and outside ofbankruptcy courts. This scrutiny has brought tolight some of the ambiguities of municipal finance.When the city of Vallejo declared bankruptcy

in 2008, it had a total budget of approximately$220 million. However, the citys bankruptcyonly concerned its $80 million General Fund.This fund is primarily responsible for payingpublic employees and supporting local services.Most of its revenues come from property taxes(23%), property transfer taxes (7%) local salestaxes (20%), utility user tax (16%) and vehi-cle license fees (12%). Other parts of the citys$220 million budget include Enterprise Funds,Water, Transportation, Marina Golf Funds,

Community Development Funds, Housing,Redevelopment, and Mare Island, PublicWorks Funds, Fleet Maintenance/Replacement,Gas Tax and Capital Projects. These funds havetheir own dedicated revenue and expendituresand, for the main, are separate financial entitiesfrom the General Fund. However, during therecent bankruptcy court proceedings of Vallejo,San Bernardino and Stockton, it has becomeevident that the practice of allocating city fundsacross various accounts differs between munici-

palities (Table 1). In Vallejo, the citys GeneralFund revenues had for decades subsidised failingredevelopment projects (Mialocq, 2008), eventhough the city had been a relative conservativeuser of TIF. However, in San Bernardino it hasbeen the General Fund (that is, public services)that has been drawing on redevelopment fundsto maintain the citys basic functions (Mulvihill,2013).

The breakdown of Vallejos general funddemonstrates the ways in which its local servicesbecame bound up with the economic perfor-mance of the municipality. When urban rede-

velopment and consumption continue to grow,the citys coffers are boosted (Hoene, 2004).Consequently the city is able to improve thecompensation of its employees and improve itslocal services. In some Californian cities thesegrowing city revenues became tied to its majorexpenditure: wages and benefits in the form ofcollective bargaining agreements (CBAs) withpublic employee unions. Many Californian cit-ies have seen employee compensation expendi-tures track at around 7080% of total General

Fund revenues. As Californian cities enjoyedyears of rapid economic growth, their employ-ees therefore collected higher salaries and gen-erous benefits. This arrangement was facilitatedby binding arbitration and compensation for-mulas that grouped proximate cities in orderto provide adjudicators with a benchmarkingmechanism. Public sector employees thereforesaw their salaries and benefits track togetheraccording to regional conditions. For example,Vallejos CBAs were based on a comparison

group of 14 cities in northern San Francisco Bayregion. Consequently, California cities relied oncontinued economic growth to fulfil the obliga-tions of 35 year CBAs.

As expenditures became linked to specu-lative revenues in many Californian cities,the business of urban governance thereforebecome focused upon ensuring local growthvia financial mechanisms based on tenuouspromises of future value generation (Weber2002, 190; Bardhan and Walker, 2011; also see

Harvey, 1989). Although not uniquethereis evidence that this was a systemic feature ofUS neo-liberal urbanisation (Kirkpatrick andSmith, 2011)in California this speculativeurbanism took an acute form due to strict state-wide fiscal restrictions, regional geographies ofeconomic growth, rampant housing speculationand strong public sector labour unions (Sowell,2009;Walters, 2010; Bardhan and Walker, 2011).


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These conditions went some way to produce amunicipal governance landscape where citycouncils and planners took part in speculativeactivities in order to maintain basic levels of

service. In this context, where the line betweenhedge fund gamblers and city managers some-times became blurred (Jorion, 1995), a suddeneconomic downturn created a fiscal and gov-ernmental crisis of great severity. Consequentattempts by municipalities and the state toresolve this fiscal have been equally sobering.

Recalibrating for austerity inCalifornia

The austerity reforms that continue to berolled out across California represent a frontierof neo-liberal recalibration, we would claim.Others have argued that it is the fountainheadof the Great Recession (Bardhan and Walker,2011, 303). Our claims are lighter on superla-tives, perhaps, but are potentially no less pro-nounced. Collectively the reforms demonstratechanges to the urban political landscape that,if introduced into other states and jurisdic-tions, look set to extendif not fundamentally

remakeneo-liberal urbanisation. This is anextended landscape of austerity urbanism inwhich the dumping of risks, responsibilities,debts and deficits, to the local scale (Peck,2012, 650) produce an increasingly unequal andunstable urban landscape, in which those whogovern cities find themselves with fewer leversto pull and under the ever more discipliningeffects of the financial markets. In this newCalifornian normal, established institutionalnotions of mutual independence have begun

to be recalibrated, with states squeezing theability of city governments to generate revenuestreams, through for example the abolition ofRDAs and their use of TIF, at the same as citiesthemselves have begun to redefine the notionof municipal failure.

Speculative risk can be managed in numer-ous ways by city governments, given their fiscalpowers and ability to reform city programmes

and services. The management of risk is alsobuilt into municipal accounting practices,whereby the separation of revenue streamsand expenditures within city budgets allocates

risk into defined accounting spaces (Gauthier,2005). Post-crisis austerity reforms in Californiaare changing how this municipal finance matrixoperates and the consequent allocations ofspeculative risk. In this section we outline theways in which Chapter 9 bankruptcies are piv-otal to this regressive reorganisation, payingparticular attention to the example of the cityof Vallejo.

Under Chapter 9, Title 11 of the UnitedStates Code, cities are permitted to declare

bankruptcy if states allow. At present only 28US states allow their municipal governments toseek Chapter 9 protection (Spiotto, 2012). Thisnumber includes a variety of authorisations: 12specifically authorise, 12 conditionally author-ise, three provide limited authorisation, andone state (Iowa) allows certain exceptions toa general prohibition. The remaining 22 stateseither prohibit or have no specific instructionsrelating to Chapter 9 (ibid.) Due to the depthsof its current municipal crisis, California has

seen the nations most Chapter 9 bankruptcyapplications. As these bankruptcies are unfold-ing, we are witnessing new interpretations ofChapter 9 law being implemented, a conse-quent redistribution of municipal debt burdens(and consequent state responses), an increasedpoliticisation of municipal finance and newdepths to municipal financial failure.

In May 2008 the City of Vallejo became thefirst post-crisis Chapter 9 applicant. Its filingwas unprecedented. Chapter 9 bankruptcy leg-

islation had been originally designed as a medi-ation process, whereby any debt readjustmenthad to be agreed with the citys major creditors(Patterson, 1942). The legislation therefore pro-vided no basis for cities to remove or restruc-ture debt obligations without creditor approval.As a consequence Chapter 9 was rarely used bymunicipalities to deal with structural financialproblems. For the most part Chapter 9 has been


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used to restructure special enterprise zonesor utility projects where dedicated revenuestreams had not delivered forecast incomes.Vallejo challenged this reading of bankruptcy

law since it did not gain the approval of itscreditors (Trotter, 2011). Instead it claimedits major creditors were making unreasonabledemands on it, leaving the city with no optionbut to restructure without their consent. Inthis case, as with all cities in the US, the majorcreditors to general operating expenses are itscurrent and previous employees, in the form oftheir wages, health benefits and pensions.

On the 13th of March 2009, a District Courtjudge granted Vallejo Chapter 9 bankruptcy

protections based on the criteria that its cashflow situation did not allow it to pay its credi-tors and good faith negotiations with unionshad failed to produce a reasonable solution.The significance of this decision extended farbeyond Vallejo, since it created the opportunity,pending court approval, for cities to unilater-ally restructure debts, including the voiding ofCBAs and bond repayments. The Vallejo judg-ment therefore radically changed the prevailinginterpretation of Chapter 9 bankruptcy law. The

consequences of this judgment are still rever-berating around the state and further afield.In California, Stockton and San Bernardinoare both currently pursuing Chapter 9 read-justment plans that are poised to shake thefoundations of Californias pension schemes,municipal bond markets and organised labour.

In Vallejo the impacts of Chapter 9 restruc-turing are still unfolding. Post-bankruptcy thecity continues to run deficits (City of Vallejo,2012). Interim CBAs have served to push

labour negotiations down the road, althoughthe efforts the city went to in order that itcould restructure its CBAs did not stop it fromoverlooking CBA renegotiation deadlines in2012, resulting in the automatic extension ofthe generous interim agreements. Howeverthe city has removed binding arbitration fromits City Charter, ensuring that pending con-tract renegotiations with unions will likely

result in industrial action. In the course ofChapter 9 restructuring, Vallejo did cap healthbenefits to retirees at $300 per month percapita (Walsh, 2011). These benefits had pre-

viously been costing the city approximately$1500 per retiree, per month (ibid.). It alsoestablished a series of concessions from bondholders and labour unions, the latter limitingwage increases and cutting mandatory staffand service levels.

It is therefore unsurprising that theCalifornian state government and related agen-cies have begun to assert their sovereign powersas municipal fiscal collapse threatens to causesignificant unrest and/or remake higher levels

of government. The Californian state pensionagency, CalPERS, has been active in attemptingto protect itself from municipalities renegingon payments. When Vallejo entered bankruptcyand had the opportunity to renege on its pen-sion obligations, the citys then finance director,Robert Stout, was informed by CalPERS thatany such move would result in endless legalaction (Walsh, 2012). No small threat for a cashstrapped city, coming as it did from a $200 bil-lion pension fund (Malanga, 2013).

The state government has also legislatedto temper potential disruptions emanatingfrom Chapter 9 filings. In 2012, state legisla-tors voted positively on Assembly Bill 506. Thebill requires a municipality to participate in a60-day neutral evaluation process or declarea fiscal emergency that jeopardises the healthand well-being of its citizens before seekingprotection under Chapter 9. Although somehave suggested the bill does little to alter theexisting Chapter 9 process (that is, it already

requires good faith negotiations with credi-tors), the legislation is indicative of the con-cern in Sacramento over the extreme austeritymeasures being formulated in cities such asVallejo, Stockton and San Bernardino.

Concerns about the fallout of Californiasmunicipal bankruptcies are also present inmunicipal bond markets. Although Vallejodid not seek to stop bond repayments, fearing


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that credit downgrades would impact its futureborrowing options, others have been less con-cerned about such implications. While a fewCalifornian cities stopping bond repayments is

insignificant in terms of the total $2.7 trillionmunicipal bond market, such actions are nev-ertheless causing significant concern in finan-cial markets. Municipal bonds have long beenconsidered a safe investment tool, given the pre-dictable revenues and expenditures of cities andimplicit state backing. Yet recent non-paymentsby fiscally beleaguered cites like Stockton andSan Bernardino have the municipal bond mar-ket asking whether levels of risk should be ratedmuch more highly, with some going as far as to

claim that investors could face potential munic-ipal bond Armageddon (Zamansky, 2013).

With many cities reliant on bond markets,there has been a requirement within city gov-ernment to designate and allocate revenuestreams in order that investments can be ratedand offered to the market (Hackworth, 2002).Yet, just as the closure of RDAs has redis-tributed risk within municipalities, Chapter 9bankruptcies have undermined prevailingunderstandings of municipal accounting and,

consequently, the financial risks associatedwith municipal debt. Municipal bonds are con-sidered conservative, low risk investments notonly because they have largely predictable rev-enues and expenditures, but also because thelegal structures of municipal finance restrictthe transfer for monies between funds to situ-ations where a return of borrowed monies canbe assured within the fiscal year (Mayer, 2008).As Vallejos bankruptcy claim was contestedin the courts, this understanding of municipal

financial regulations was much debated.For the fiscal year ending in June 2007,Vallejo had a total cash balance of $211 millionin reserves. Only a proportion of this was in thesoon-to-be-bankrupt General Fund. Some $61million was administered by legally separateauthorities, such as the Vallejo Sanitation andFlood Control District, and the Marine WorldJoint Powers Agency (Tanner et al. 2008: 12).

Restricted trust accountsprimarily subjectto debt covenantsaccounted for $48 million.An additional $13 million was held as fiduciaryfunds for the citys five improvement districts.

The remaining $89 million in revenue was allo-cated to the General Fund (ibid.). When thecity filed for bankruptcy, it was specifically filingfor the bankruptcy of the General Fund.

During bankruptcy hearings, the unionsrepresentatives argued that the city could findmonies to cover General Fund shortfalls fromother accounts in the city budget, just as it haddone in previous years (Mialocq, 2008). This waschallenged by the citys financial manager, whoargued that any such transfers would be illegal

if the city could not demonstrate an ability torepay transferred funds (Mayer, 2008). Thisissue also drew the attention of the citys majorbond holders, who refused to renegotiate debtrepayments in the absence of an assurance thatthe General Fund could become solvent with-out continual draw-downs from other funds. So,Vallejos biggest bond-related creditor, UnionBank, agreed to restructure its debts during thecourse of the citys bankruptcy, taking a 40%reduction in repayments (York, 2011).

Bond markets, via their rating of risk, acton the presumption that different municipalaccounts remain largely independent (McGee,2011). So, for example, when they finance asewer project the assumption is that sufficientrevenues associated with the project will be heldwithin that account. The prospect of movingfunds across accounts therefore changes calcu-lations of risk. This political problem has onlyintensified in many cities as RDAs have becomeincorporated with general city budgeting.

The closure of the Vallejo RDAalong withover 400 others across the stateon the 1stof February 2012 further worsened the citysalready ailing financial situation. However, theimpact of RDA closure was less severe in Vallejothan it was in, for example, San Bernardino.Why? Well, because as we have noted earlier,the city had been a relatively conservative userof TIF and property values had grown modestly


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in recent years compared to other areas of thestate (Interview 65, April 2012). Vallejo citygovernment and the RDA also had a strainedrelationship. Unlike the majority of cases

across the state, the city retained its proportionof the relatively small increment that had beengenerated (Interview 73, April 2012). Indeed,the city government regularly subsidised theRDA (Mialocq, 2008). Not only did this reducethe budget of the RDA; it also signalled topotential investors a lack of unity in terms ofeconomic redevelopment strategy. This is per-haps best reflected in the failure of the RDA todeliver the redevelopment of the Mare Islandnaval yard. Closed in 1996, the RDA had over-

seen various attempts to redevelop the land. Allfailed. As a result the TIF revenue stream wasjust over $2 million per annum when the RDAwas wound-down.

Vallejo therefore failed to utilise TIF andRDAs for significant speculative gains and, assuch, could not incorporate these prospectiveincomes into its budgeting. Indeed, the oppositewas true; the highly speculative activities of itsRDA, such that they were, cost the city money.The factional local political context therefore

forced the city government to rely on othersources of speculative income, such as prop-erty development fees and local consumptiontaxes, to boost revenues and support local ser-vices. When Vallejos property market crashedand housing construction abruptly slowed in2008, the past failures of the citys RDA maywell have served to (relatively) limit the imme-diate budgetary impact of economic recession.However, the city found itself in the same placeas many others: facing a curtailing of specula-

tion-fuelled revenue growth and escalating long-term spending and debt repayment obligations.As many cities in California face fiscal col-

lapse, they are therefore being drawn to politi-cal decision-making that requires them toidentify winners and losers. In Vallejos case,the city government reduced health benefitsand left pension and bond obligations largelyin place. However more dramatic changes are

being made in Stockton and San Bernardino. Inboth these cities, places where RDAs have sub-sidised General Fund operating expenses, citycouncils have voted to stop payments to bond-

holders. In what are being described as testcases in the titanic battle over whether munici-pal bondholders or current and retired employ-ees will absorb most of the pain when a stateor local government goes broke (Reid, 2013)these cities are deciding who pays for specu-lative failure. This, as it occurs within newlyminted post-Chapter 9, post-RDA closurebudgets, is recasting the financial landscape ofurban governance in California.

Whilst places like Vallejo, Stockton and San

Bernardino formulate austerity budgets, theconsequences of failure within the system ofspeculative urbanism appear to be reachinggreater depths. When Vallejo entered bank-ruptcy during 2008, the following 2 years fea-tured a host of news articles describing thecitys failures. Storylines focused on the grow-ing problem of prostitution and the increasingnumber of medical marijuana dispensaries dot-ted around the citys downtown. On the 22nd ofAugust 2011, Bloomberg news ran the headline

Prostitutes Flood Vallejo as Bankrupt CitySlashes Police Force by a Third. The headlinereflected the city polices austerity-led decisionto only respond to emergency calls and dra-matically cut regular patrols. Indeed, through-out 20089 residents complained that calls tothe Police Department regularly went to voice-mail (Interview 28A, October 2012). Similarcutbacks have been implemented in the firedepartment, where stations have been closedand the number of firefighters significantly

reduced (Interview 3, July 2010).With local emergency services stretched andresidents increasingly uneasy with levels of ser-vice, community relations have become tense.During 2012 Vallejo police shot and killed sixpeople in the city. On each occasion policeofficers claimed that the use of deadly force wasjustified. The deaths have highlighted the racialdivides within the town. When residents packed


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into city hall on 11 September 2012 to protestthe conduct of Vallejos police, the majorityof attendees were racial minorities. The sister,Cindy Mitchell, of one of the shooting victims,

Romero Mitchell (killed 2 September 2012,reaching for a pellet gun in his car), spoke atthe meeting about the mischaracterisations ofher brother that had circulated after his death:you guys are slandering my brothers name,calling him a parolee when he was never onparole, never been to prison, never sold drugs,never, okay! Other residents interviewedcomplained that their working class neighbour-hoods had become policed by shoot happycops who only cared about protecting each

other and their big paychecks (Interview 34B,September 2012).

Middle-class residents have not been exemptfrom austerity, however. On Mare Island, resi-dents who bought houses in new bourgeois resi-dential districts constructed in the early 2000ssaw two fire houses close in 2010 as the cityimplemented bankruptcy-related cutbacks. Theclosing of Station 28 on Nimitz Avenue, locatedon Mare Island, meant the new residents of thepeninsula development now have no local emer-

gency services and face much longer responsetimes. Although the fire unions challenged thelegality of these cutbacks, they have remainedin place leaving middle-class residents in MareIsland without previously mandated levels ofemergency services. Residents complained thatthey still pay a supplemental local tax that wasintended to support these services (Interview2C, September 2012). This situation will becomemore precarious when a local bridge is closed forrepairs, leaving the emergency services an addi-

tional two miles to travel to Mare Island.Vallejos descent into bankruptcy has there-fore redefined levels of service provision. Policeand fire services are run at bare minimums,answering only emergency calls. The resultingsituation has witnessed growing intra- and inter-community tensions across the city, as residentsblame the citys financial failures for shootings,high crime rates and house fires. Vallejos fiscal

crisis is therefore redrawing the depths of spec-ulative failure: fire and police services are beingreduced to levels previously thought unsafe;local services, such as libraries and community

programmes have been reduced or removed.The costs of being a failed entrepreneurialand speculative city appear greater than everbefore.

Conclusion

Cities are where austerity bites (Peck,2012, 629)

According to Gelinas (2010, np) [t]he uncom-fortable truth is that as municipal debt grows, therisk mounts that someday it will be politically,economically and financially worthwhile forborrowers to escape it. Writing after the bank-ruptcy of Vallejo and before San Bernardinoand Stockton followed suit, this piece in theCity Journal at the Manhattan Institute criti-cised investors who continue to value munici-pal bonds despite the evidence that many citiesand counties have overstretched themselves.

The argument was a simple one. Investors arekidding themselves if they think that states andcities cant fail. They can and they do. A grow-ing number of Californian cities have eitherdeclaring bankruptcy or have threatened todo so as a means of gaining leverage over debtholders, labour unions and state officials. Thisis a high stakes game. The deficit crisis cre-ated an opportunity for conservative state gov-ernments to both slash government spendingand seriously weaken or destroy public sector

unions, according to Crotty (2012, 97).While it is likely that few on either the leftor the right would argue that California is aconservative state, nevertheless, what we arewitnessing currently within it are city gov-ernments implementing locally what wasdefeated nationally (Davis 2013, 10). So,the services that are now being targeted, inplaces such as Vallejo and San Bernardino, in


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the name of austerity are those that remainedlargely untouched by past waves of neo-liberaloutsourcing and privatisation. Fire and policeprofessionsand their associated pay and pen-

sionhave been targeted by city officials inorder to cut public expenditure to the pointwhere it balances out with shrinking propertytax revenues. Meanwhile, a range of servicesare being cut: lights being turned off, schoolsbeing closed and streets being left uncleaned.

As the costs of the financial crisis are dividedbetween different levels of government (seePeck, 2012), many cities are ill-prepared to dealwith any newly imposed responsibilities. Whenthe Californian state government closed its

RDAs, a number of the states cities faced fis-cal failure. Already addicted to growth and bur-dened with high levels of debt, they have foundthemselves with few reform options. WhenVallejo was granted Chapter 9 eligibility in2008, it offered a way forward for beleagueredcities: bankruptcy protected reforms to CBAsand bond debt. As the subsequent Chapter 9filings of San Bernardino and Stockton aredemonstrating, this combination of urban fiscalcrisis and new legislative context has created a

new regime of action.Speculative urbanism under austerity is cre-

ating a turbulent and insecure political land-scape. Whilst those cities that have pursuedbankruptcy have brought crisis to retirees inill-health (that is, Vallejo) and slashed the valueof bond holdings (that is, San Bernardino andStockton), these cases are also changing thestakes of municipal politics. What were oncesacred cows are now fair game, enabling cit-ies in fiscal crisis to threaten creditors with

unilateral changes that would, a short timeago, have been unthinkable. This has not goneunnoticed to the purveyors of neoliberal ideol-ogy such as the Manhattan Institute (Gelinas,2013) and Heritage Foundation (Tucker, 2013),both of whom have cast municipal bankruptcyas an indicator of liberal governmental fail-ure and have made the case for further neo-liberal reform. City hall has therefore once

again become a key venue of class politics inthe age of austerity, the place where attempts toresolve a structural economic crisis are playingout, but where local decisions are informed, if

not sometimes determined, but a legacy of fis-cal calculations make in reference to globalfinancial markets.

Acknowledgements

The authors acknowledge the work of the journaleditors, the reviewers and all of those who gave gen-erously of their time on these projects. This paperdraws upon no funded research. The usual disclaim-ers apply.

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Cambridge J Regions Econ Soc 2014 Davidson 81 97