Early Warning System

California Treasurer Bill Lockyer reports the state is working on the development of an early warning system to prevent more municipal bankruptcies through early detection of signs of financial trouble. He compared the goal to stress testing, “where we try to determine what are the right metrics to cause red flags, alarm, some form of friendly discussions with experts, external advisers about what might be done to avoid a potential crisis.’’ Stockton, San Bernardino, and Mammoth Lakes have sought Chapter 9 protection, stoking investor concerns that more will follow as finances worsen and bankruptcy’s stigma fades. Mr. Lockyer said he does not expect the trend to continue: “I agree with those who have said probably not, there may be some, not very many.” The early-detection system is a collaboration among the treasurer’s office, the controller, the Legislature, and officials in Los Angeles and San Diego, according to Mr. Lockyer. Lawmakers would have to approve the plan. Analysts at the conference said they are taking a closer look at the willingness of California cities to repay their debt in light of the bankruptcies. “It is difficult to assess a city just based on the numbers,’’ said Melanie Tung, senior municipal research analyst at Wells Capital Management. “Management, the willingness and ability to pay – those are measurements that we have looked at and are trying to examine more closely as we look at credits now in this environment.” Treasurer Lockyer stated he did not believe California municipalities are becoming less willing to repay their debt: “Just the opposite.’’ As per the above, however, Moody’s and S&P appear to differ in their predictions of further municipal bankruptcies in California. Gabriel Petek, an S&P analyst , said he does not anticipate a “tsunami’’ of filings, noting the communities in bankruptcy are a fraction of the 482 cities in the state: Of the 201 communities that S&P rates, he noted: “we believe that those that are at most risk of encountering this level of financial distress are already at the very low end of the rating spectrum.” Moody’s, as per the above, seems more pessimistic.