Bankruptcy Would Be Largest Municipal Failure in the Nation

Skippy Massey
Humboldt Sentinel

Like a goldfish taking its final gasps of air, one of California’s largest cities may soon be floating on the surface of insolvency.  The difference is, at least you can eat the goldfish.

As the Humboldt County Board of Supervisors approved their fiscal year budget today and Governor Brown lends his pen to signing California’s later this week, a black hole underscoring the Golden State’s money woes is set to unravel as early as tomorrow:  the City of Stockton.

According to City Manager Bob Deis, Stockton could file for bankruptcy as early as Wednesday.  If that happens, the town of 300,000 people on the San Joaquin River will become the largest U.S. municipality to go belly-up—dripping in red ink and defaulting on its bonds, creditors, and fiscal obligations.

Vallejo, encompassing half the population of Stockton, was previously the biggest U.S. city to file for bankruptcy to date in 2008.

The Stockton City Council will meet tonight to decide the city’s fate.  With the proceedings broadcast live on Stockton’s public access website, citizens are unsure what will happen or even what to expect for their failing city.  We’ll give you a hint:  the Good, the Bad, and the Ugly.

City administrators have been closely eyeing bankruptcy as the easier route out of crippling debts, even if its creditors are left holding the bag.

The city said in a June 20 statement that to make further cuts meeting their fiscal obligations would be to invite chaos:  “Continued service reductions will harm the health and safety of (Stockton) citizens,” the statement reads.  Stockton Mayor Ann Johnston added:  “We cannot sacrifice the health, safety and welfare of our community.”  Translation:  too big to fail, someone’s gotta pay our salaries and pensions.

Stockton administrators believe a bankruptcy filing would be an advantageous move, buying time for the city to renegotiate its debts on terms that are more favorable.  It would remove, at least temporarily, the need for Stockton to make even more drastic budget cuts than those already made.

Stockton got into its sticky wicket dilemma by amply spending on itself, riding the cusp of rising home values and constructing new housing developments as the economy boomed.  The city, before seeing the bursting of its real estate bubble in 2007, had been riding high for quite some time.  Between 2000 and 2006, housing prices rose from a median of slightly more than $110,000 to almost $400,000.  In 2007, the crashing economy, foreclosures, and depressed sales led property values to diminish to a fraction of their former worth.

The city spent generously on projects to rehabilitate and beautify its downtown and develop a downtown marina.  They got grandiose dreams and overspent more than they had on the Stockton Arena Project in 2010.   To pay for the arena’s cost overruns, then-City manager Mark Lewis took money from all of Stockton’s redevelopment districts, leaving them broke.   To placate neighborhood critics who had been waiting for years for their redevelopment districts to produce money, then-Mayor Ed Chavez created the Strong Neighborhood Initiative.  The city went in hock for $100 million in bond debt to finance neighborhood improvements which redevelopment could have paid.  The former manager and mayor left, but the problems they left behind stuck.  In other words:  Stockton overspent what it had and created a back-breaking debt as the rats were fleeing the sinking ship.

They also augmented the salary and benefits of city workers beyond its means.  California Common Sense (CCS), a nonpartisan, nonprofit group advocating financial transparency, prepared an analysis report entitled, “How Stockton Went Bust,” detailing how the city got into its current dilemma.  What they’ve got to say doesn’t paint a pretty picture.

The generous employment agreements, to which the city committed in the mid-2000s, now comprise the bulk of the city’s budget. “The city now faces more than $800 million in unfunded liabilities for pensions and other retirement benefits,” the CCS report notes.  Translation:  Yowza, Holy Cow, and Heavens to Betsy, that’s a lot of padding and payola hay to pay.

Stockton has made attempts towards fiscal cuts.  The City Council addressed about $90 million in deficits over the past three years, eliminating 25 percent of the city’s police force, 30 percent of its firefighters, and 43 percent of all other employees, according to the city’s news release.  Translation: we’re now known as one of the lousiest crime-ridden communities in the Golden State.

Stockton attempted to boost revenue through fines and parking citations, eliminating payments of bonds, modifications to terms of its labor agreements, and making salary and benefit reductions.  Despite such efforts, the city now faces a $26 million deficit in the fiscal year July 1.  California’s state Constitution requires cities to adopt a balanced budget by July 1 of each year.

Stockton is the first financially troubled city in California to be subject to a AB 506, new state statute that requires cities and their creditors to submit to mediation in an effort to avoid bankruptcy.  The last day of the required mediation period ended Monday.  Confidentiality requirements prohibit the city, its unions or its creditors from commenting publicly on the outcome of the mediation/arbitration negotiations.  Translation:  we don’t need no stinkin’ badges– and we’re not telling you.

Mayor Johnston said in a prepared statement last week, “We have to be prepared for any potential outcome of the confidential mediation.  If we don’t reach agreements with our creditors that help us avoid insolvency, we have to be prepared with alternatives that we have worked so hard to avoid.”   Translation:  she means bankruptcy.

City Manager Bob Deis added, “This is not where any of us wanted to be.  But, absent restructuring agreements with our creditors, any other options would decimate the city of Stockton.”

If the city files for bankruptcy protection, Deis said, “the citizens of Stockton will not see any measurable change in service levels, come July 1.”  Translation:  We’ll still be a miserable place to live in.

Stockton is teetering on the verge of insolvency—a financial basket case– and at least one reporter believes it compares to the woes of Greece and Spain.  The town’s finances are so bad that the journalist from Barcelona, Spain, arrived to report on the city’s situation and hopes his coverage will offer readers back home in Europe pointers of what not to do.  We hope he didn’t travel here on Spain’s dime.

“I am doing a couple of stories, trying to understand what the parallels and differences are between California and the Spanish and Greek debt crises– and what lessons can be learned,” Marc Bassets, correspondent for the newspaper La Vanguardia, told the Stockton Record.

“The question is how exactly is California dealing with the issue?” he asked.  Translation:  OMG-WTF?

Stocktonians will be seeing what unfolds for them as the City Council convenes tonight, as will the weight of the Golden State and the Nation watching at large.

We hope the City of Stockton has some answers come Wednesday– for what looks like the worst municipal failure ever to occur in the United States.

UPDATE JUNE 26, 2012 9:25 P.M:  It’s a done deal– and the Sentinel told you first.

(CBS News) “Officials in Stockton said Tuesday that mediation with creditors has failed, meaning the Central California city is set to become the largest American city ever to declare bankruptcy.  A source confirmed with CBS prior to the City Council meeting that Stockton will indeed file for Chapter 9 bankruptcy protection.

“City Manager Bob Deis said officials were unable to reach a deal to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy.  The City Council is expected to vote on a special bankruptcy budget to plug next year’s anticipated $26 million deficit, and city lawyers could file for Chapter 9 protection in court as soon as Wednesday…”

Read more:  CBS News’ “Stockton, Calif., To Become Largest City to Declare Bankruptcy”

* * * * * * * *

Yes, folks, the good news is that the surgery was a success.  The bad news is the patient has died.