Stockton, California Went Bankrupt. is Your City Next?

bjbj, TEASER DEIS - $600,000 to $1 million we ve committed to for each employee and we ve set aside nothing. TITLE CARD - As Goes Stockton Goes California? INTRO [broll - downtown Stockton sign, headlines, city council broll] In late June 2012, Stockton, California filed Chapter Nine bankruptcy. It wasn t the first California city to do so, and with San Bernardino following suit weeks later, it s not the last. But so far, with a population of just under 300,000, it is the biggest in U.S. history. [broll - Stockton map, San Francisco, Stockton home values graph] An agricultural center located just outside of San Francisco in California s Central Valley, Stockton was a booming suburb in the 1990s, providing an affordable living alternative to the pricey real estate of the Bay Area. [broll - public works projects] Living large off the new property taxes created by the housing bubble, the city government spent lavishly on big public works projects, like a waterfront park, an arena, and a brand new city hall, which sits nearly empty as the city government could never actually afford to move in. For awhile, things seemed to be looking up for Stockton, which has long been one of California s most economically depressed cities. Promotional flyers still remain plastered to empty buildings downtown, reminders of a more hopeful time. The city council also caved to increasing pressure from the city s public employee unions and approved major bumps in their benefit packages, including lifetime medical benefits to city retirees with as little as one month employment in the city. The city now faces more than $800 million dollars in unfunded liabilities for pensions and other post-employment benefits. MILLER - 12:20 - our revenues plummeted. So we're saddled with this debt that we don't have the revenues anymore to service. With revenue dwindling in the wake of the housing crash, Stockton issued a $125 million bond in 2007 to help fill the budget gap. But these back-end loaded bonds saddled the city with an annual payment of $16.8 million as of this year, with ballooning payments rising to $22.3 million next year, and a nearly doubling to $30.2 million by 2020. City council member and Vice Mayor Kathy Miller was elected in 2009 and says that while she was expecting to clean up a mess when she got into office, she didn t realize it would be this big of a mess. MILLER - 1:40 - I was shocked by how deep it went, by how ingrained it was, by how long bad decisions had been made in the city, and how it had really created a culture that was not responsive to the public. 2:10 - It was internally focused on what was best for the city and what was best for its employees, not necessarily what was best for the public. Miller describes a political culture in which generous handouts to public employee unions were masked through the tricky accounting of a savvy city manager who enabled local government officials to give in to nearly every union demand. MILLER - the quality of that information that the councils received in the nineties, from then city manager Dwayne Milnes, was not complete. It was not always accurate. And in some cases, it was almost misleading. Dwayne Milnes was Stockton s city manager in the 90s and signed off on many of these benefit packages. MILNES - 20:20 - in retrospect, we should have been more restrictive in that plan than we were. I say, "in retrospect" because when you look at what's happened with medical inflation, we really should have. But we didn't know it was going to happen. Milnes now runs Stockton s Association of Retired Employees, which is fighting to preserve many of those very same benefits that Milnes now admits were a mistake for the city, like a medical plan offering free - The city unilaterally reduced the medical benefits of retirees by about 30% without notice, and it was important that we form an association so that we could approach the city and say, "look, these are vested rights. If you have a need to reduce them, you need to come talk to us." Milnes doesn t believe the he or the city council members he advised are to blame for Stockton s dire situation and says that the economic downturn would have put Stockton in this situation with or without the public spending binge. MILNES - 10:00 - I've seen cities that have this same pension system paying pretty much the same pension rates that Stockton is doing and are not about ready to fall off the cliff. They're making adjustments. 10:27 - When you ask who's going to tip over, it's not who is providing the pension benefits. It's who is providing the pension benefits in an economic environment where they can't afford it. But Reason Foundation Senior Policy Analyst Adam Summers says that Stockton s story is becoming an increasingly common one, as public officials have no incentive to rein in spending before hitting the brink. ADAM SUMMERS You re going to see more and more cities kind of going the way of Stockton and San Bernardino and Vallejo . You have moral hazard won t have to bear the costs of those decisions. 30:30 - we had a City Manager who publicly has stated all during the nineties while he was here, he didn't like having to negotiate every year with his public employee unions, and so, he granted generous long-term contracts, because he didn't want to do it. 26:55 - Malarkey. She was not in the closed sessions when we were very, very clear with the city council in detail, what was being negotiated, what the cost of those things were. I'm the last guy who's going to tell you what you want to hear. Putting the history for the bad deal aside, today s reality is that the unfunded retiree benefits have gutted the city s general fund, though it s supposed to pay for the most basic government services like police and fire. ADAM SUMMERS When you have govt. making promises it can t keep, it s eating up resources for public safety . And that has a kind of ripple effect on the general fund for everything the government does. One result in Stockton is that the police force shrank by 26 percent in four years, and last year the city faced a record 58 murders. Halfway into 2012, they ve already had 34. NANCE - 5:00 - Stockton's a very dangerous place to live. 5:30 - Anybody can be victimized. The number of car robberies is going up, the number of shootings, it's all rising. So people are more likely to be a victim of a crime then they ever have in their life. Kathryn Nance is a police sergeant and member of the Stockton Police Officers Association, which has several lawsuits against the city. NANCE - 6:50 - They kept spending in a lot of different places, they kept spending with labor unions, kept spending on contracts, but kept spending to build things they couldn't afford. So while the police officers and the fire dpeartment at fair market value at one point, now that's taken away because we're now below market value and unable to retain or recruit people. But in yet another example of the city s loose accounting, 3 of the last 4 police chiefs served fewer than three years in Stockton, and used the inflated salaries in those final years of their service to retire with massive pensions, some of which exceed $200,000 a year. While the last remnants of a fading movement Occupy one of the city s nearly empty public parks, Kathy Miller says it s not corporate pay, but public sector pay that s out of sync with reality in Stockton. MILLER - 8:00 - the compensation for public employees, the gap widened between what they were earning and what the average taxpayer was earning. I mean, this is in a county where the average living person earns less than fifty thousand dollars a year. MILLER 8:15 - I think it created a culture where public employees, there's a real disconnect between them and the average working family in our county. While California s state-run pension system, CalPers, has left cities particularly vulnerable to budget meltdowns, Summers warns that the problem isn t confined to the Golden State. ADAM SUMMERS Cities across the country have made the same poor decisions stress on local budgets SUMMERS I think they re going to have to follow the example of San Diego 47:58 - this is not a partisan issue at all. This is a good government issue. when we get out of touch with that and begin acting like it's our money, it's not the people's money, that's where you get into real serious problems. Stockton officials hope bankruptcy will allow the city to opt out of some of its more stifling contracts and to avoid repaying all of the bondholders while maintaining some money in the general fund to keep its most basic city services. The city has already been downgraded by credit ratings agencies, which will severely restrict its borrowing ability. Retirees probably won t be seeing the benefits they were promised by city officials. And taxpayers aren t likely to see improved city services any time soon. But with cities across the country locked into expensive long-term contracts, Stockton s title as the largest U.S. city to ever go bankrupt might be short-lived. gdeL nbnbnbnbnR h N' h N' h N' h N' h N' gdeL :peL [Content_Types].xml #!MB Lz]__ U~YkG _rels/.rels theme/theme/themeManager.xml sQ}# theme/theme/theme1.xml G$$DA :$BR si-@R r,[L bX*x KfN1 ,tV@ .EML M .c = Reason Foundation Normal.dotm Reason Foundation Microsoft Macintosh Word PICT F1g9g9F1R kZkZg9 JRkZc JRkZg9kZg9g9c g9kZ^ kZg9V kZo{ g9NsZ NskZc +g9c kZg9g9Z kZg9Z 5kZg9kZc o{g9V kZg9 o{kZ^ g9g9^ g9kZ{ g9kZkZo{g9^ g9o{w o{kZs NsNsc g9Nsg9V o{kZc o{kZV o{g9Z kZg9 oeke oekEw JBJBFBZ JBg#F"Nbg#kCR JbF"Z JbF"Z ocB"V NbJBV kCkckCo ockCo kCoco gCkC c#ockCockCs gCkcs gCkC ockCw g#ocw ocgCkc{ @g*s kCkcocs g#oc{ kCkCw occ#kcc gCg#kckCs c#kCkcc kcocs JBNbNbJBV F"c#R Nbc#c g#g#kcw gCkCc ockCkCV kCkco gCgCococs kcocgCc ockC ockCw kCg#c#kC^ kcockCkCoc^