A thorough academic study of the biggest government bankruptcy in
US history. Baldassare, a scholar at the University of California,
Irvine, likens the Orange County crisis to other recent municipal
crashes - up to a point. Despite its image as an affluent,
lily-white enclave, Orange County fell victim to several problems:
increased costs from rapid population growth, including an influx
of poor immigrants who were especially heavy users of services;
post - Proposition 13 financial constraints which precluded county
government from raising taxes commensurate with the voters' desire
for services; and the recession of the early '90s, which caused the
state government to reduce aid to counties. To this familiar mix
was added an exceptionally large measure of malfeasance. Attempting
to provide more for less, the county treasurer (whose activities
received virtually no oversight from other elected officials)
pursued a highly risky investment strategy that led to a severe
shortfall and, ultimately, the December 1994 bankruptcy filing. A
special election to raise the sales tax resulted in a ringing (and
predictable) defeat. County leaders then developed a plan that
depended on drastically cutting services, especially for the poor.
Although the bankruptcy officially ended within a year, the
ultimate resolution depends on speculative litigation against a
number of financial institutions with which the treasurer did
business, and Orange County's credit may be diminished for years to
come. Since politicians in suburban counties across the country are
under similar pressures to raise revenues without raising taxes,
the Orange County scenario could recur, and Baldassare devotes his
closing chapters to a discussion of lessons learned and
recommendations for policy changes. Although Baldassare writes
clearly, he makes no concessions to the general reader; surely the
fact that the treasurer took financial advice from psychics
deserves more than passing mention. But the book is directed at
"policy makers and scholars," for whom it should be illuminating.
Sober and sobering. (Kirkus Reviews)
When Orange County, California, filed for Chapter 9 protection on
December 6, 1994, it became the largest municipality in United
States history to declare bankruptcy. In the first comprehensive
analysis of this momentous fiscal crisis, Mark Baldassare uncovers
the many twists and turns from the dark days in December 1994 to
the financial recovery of June 1996. Utilizing a wealth of primary
materials from the county government and Merrill Lynch, as well as
interviews with key officials and players in this drama, Mark
Baldassare untangles the causes of this $1.64 billion fiasco. He
finds three factors critical to understanding the bankruptcy: one,
the political fragmentation of the numerous local governments in
the area; two, the fiscal conservatism underlying voters' feelings
about their tax dollars; three, the financial austerity in state
government and in meeting rising state expenditures. Baldassare
finds that these forces help to explain how a county known for its
affluence and conservative politics could have allowed its cities'
school, water, transportation, and sanitation agencies to be held
hostage to this failed investment pool. Meticulously examining the
events that led up to the bankruptcy, the local officials' response
to the fiscal emergency, and the road to fiscal recovery - as well
as the governmental reforms engendered by the crisis - "When
Government Fails" is a dramatic and instructive economic morality
tale. Eminently readable, it underlines the dangers inherent in a
freewheeling bull economy and the imperatives of local and state
governments to protect fiscal assets. As Baldassare shows, Orange
County need not - and should not - happen again.
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