“Oil Capital of California” Declares Fiscal Emergency

Oil, pensions, and a new jail sink Kern County.

Crude oil plunged 4% on Wednesday, with West Texas Intermediate now at a new multiyear low of $44.36 per barrel. Consumers love the cheaper gasoline, and they’re saving their money, and some of them are shifting it to iPhones, food, and whatnot. But the economic consequences of the collapse in oil and natural gas prices are ricocheting around the largest hydrocarbon producer in the world, the USA.

Kern County, which includes the city of Bakersfield, is considered the oil capital of California. Its Midway-Sunset oil field amounts to about 4% of US oil production. The local crude oil grade, Midway-Sunset, traded for $101.87 in June 2014. Chevron’s Price Bulletin on January 28 priced it at $38.94. A 61% plunge.

The oil and gas sector in Kern County, as elsewhere, has responded to the new pricing reality with layoffs.

“If it continues and you see more of the layoffs, you’re going to definitely see it trickle down,” fretted Melissa Rossiter of the Greater Bakersfield Chamber of Commerce on KBAK TV two weeks ago.

“We’re probably looking at about 24,000 jobs,” guesstimated real-estate appraiser Gary Crabtree. “It just dominoes to everything … New construction may be affected,” he said. “We’re just waiting for the next shoe to drop. I think everyone is just holding their breath. Probably the only ones that are panicking at this point in time is the government.”

And the government has reason to panic.

Where does Kern County get much of its money? Property taxes. Oil and gas properties, according to the Assessor’s Office, accounted for almost 35% of the assessment roll in 2013. And these properties have seen their assessed values nosedive in sync with the price of oil.

As a result, oil-property taxes are expected to plunge by $61 million in the next fiscal year, starting July 1. The estimate is based on a price of Midway-Sunset crude of $55 a barrel – quite an uptick from today’s $38.94 a barrel.

That’s not the only problem.

Pension costs have spiraled out of control, and no one can figure out what to do about them. By dropping the annual assumed rate of return from an unrealistic, nay, ridiculously high 7.75% to a nearly as ridiculously high 7.5%, the county’s pension costs will jump another $21 million in the next fiscal year, to $300 million a year.

And then there’s the new county jail, that after over six years of debate, was approved last December, the biggest public works project Kern County government has tackled in at least 15 years, maybe more, according to Assistant County Administrative Officer Jeff Frapwell. The first $100 million will be paid by state grant. The remainder of the operating costs, including $20.5 million for the initial staffing costs, will be up to the county. But it no longer has the money.

Plunging revenues and soaring costs topped off with layoffs in the private sector and wage cuts or furloughs in the public sector are a highly toxic mix. The effects will ripple into retail sales, and thus sales tax revenues, then spread to housing, with one domino falling after another. To avert a fiscal fiasco, the County Board of Supervisors would have to come up with a plan.

That was two weeks ago. Now Kern County supervisors came up with their plan, an ingenious one: they declared a state of fiscal emergency.

It won’t solve the oil-property tax crisis or the insurmountable pension-costs debacle, but it will allow the county to tap into its $40-million reserve fund to balance the budget, and it will allow the county to whittle down staffing at the fire department.

The county’s general fund will absorb $44 million of the $61 million shortfall, and the county’s fire fund will be hit with the remaining $17 million, officials said. Cuts will have to be made, and they’re trying to start making them now, rather than all at once in July. To fund the staffing costs of the jail, all departments in the general fund will get cut equally for five years.

Everyone in Kern County is hoping that oil prices will shoot back up. The county is, and has been for decades, strongly Republican, and this kind of mess is embarrassing. They’re having visions of a hockey-stick recovery. Some of them are hoping that the Fed will step in and do a QE-Oil or something, or that the despised White House will announce that it would speed up buying oil for the Strategic Petroleum Reserve. Anything to get prices back up.

But both of these options would be fraught with political risks: bailing out the oil industry by hitting consumers in their wallets before an election? So maybe not.

Kern County’s scenario is beginning to play out across the oil patch in North America. Only the nuances and numbers are different. In Canada, the Province of Alberta is already getting hit hard by low oil prices [Recession in Tar-Sands Rich Alberta?]. In the US, all oil states are impacted, but none more than Alaska [Alaska’s State Budget Collapses by 50%].

What’s happening in Kern County is a microcosm of the insidious nature of an oil bust whose many tentacles are grabbing and strangling different aspects of the economy and government. It invariably exposes the sins committed and false promises made during good times, when the price of oil was so high that everything was possible and nothing could go wrong.

The oil bust is also demolishing the junk bonds that funded the fracking boom. But now, the pain is spreading to non-energy companies. Read… Junk-Bond Bubble Implodes Beyond Energy, Deals Scuttled, Yields Soar, Suddenly “Insufficient Demand”

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  3 comments for ““Oil Capital of California” Declares Fiscal Emergency

  1. MC says:

    Bailout for the oil industry… it’s not going to happen. Small and medium sized fracking and shale operators have nothing of Exxon’s, Chevron’s, BP’s etc political muscle. As I’ve already said these gigantic corporations can not only weather the storm but profit from it by scooping up licenses and assets at clearance prices. They have no interest in seeing smaller competitors propped up.

    But the oil industry is just the tip of the iceberg, very much like empty shopping malls are the tip of the iceberg in China. Fracking and shale sustained a boom for local banks and local governments, among other things.
    Local banks will not demand a bailout. They expect it: 2008 changed everything. Will they get it? Most likely, in one form or another.
    Local governments, now… they are the same everywhere: California, Texas, China, Catalunya… if you think Washington, Beijing and Madrid have holes in their hands when it comes at handling money, local governments take things to the next level. At local level it’s not only “spend every dime you take in even before the check clears”, but “mortgage your future and that of your grandchildren” as well… without the benefit of a central bank coming to the rescue.

    Local governments tend to be run in very peculiar fashion. Each time there’s an increase in revenues, no matter how temporary, it’s taken to be something that will last for all eternity.
    Let’s make a funny example here. Let’s say a local government buys a lottery ticket and wins $5 million. Everybody knows it’s a one time event and hence should go towards one time expenses: pay off part of the existing debt, build a new school, carry out long delayed repairs… whatever.
    Instead local governments think they will win money each and every time they buy a lottery ticket, hence the money mostly goes into non-discretionary spending, such pensions, healthcare benefits for employees, hiring more teachers…
    When money dries up, non-discretionary spending cannot be cut, or at least not without igniting a political firestorm. Hence discretionary spending gets hit with a ton of bricks.
    For local governments, discretionary spending doesn’t mean building a new aircraft carrier, buying more fighter jets or invading another country. It means resurfacing roads, maintaining the sewage system, paying utility bills to keep streetlights lit at night… a country can live without more jet fighters without seeing its quality of life degraded. But a country cannot pretend “the good times are here” when roads have potholes so big you could raise catfish in them or streetlights get turned off at midnight to “save money”.

    • Petunia says:

      I agree with every thing you say about local govts. I would like to add something that I have seen here in Florida. Many local govt boards, county, city, water, etc., have been infiltrated by financial professionals. The tentacles of Wall St. run deep here. These people tend to steer their boards to projects that require financing to complete. They make it a point to say that they and their firms cannot bid on the financing for the projects and they do not. However, there are maybe five firms down here that finance everything. If you were the suspicious type and had any knowledge of how bond deals are sold you would suspect that they are syndicating these deals. It would be easy for these people to split the business and most other board members, as well as voters, would be none the wiser.

  2. Julian the Apostate says:

    Kern County may well be the poster child for idiocy in Sacremento. Prior to the oil market crash their agriculture component was wiped out by a combination of water mismanagement and the severe drought. They don’t have much left to survive on. I suspect their affinity for the Republican Party might play a role, but the whole state is insane.

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