Stockton, California made history in June 2012 when it became the largest U.S. municipality in history to file Chapter 9 bankruptcy. It wasn’t the first Golden State city to do so, and what’s happening in out west is spreading to the rest of the country.
Stockton, like many U.S. city governments, spent lavishly throughout the 1990s when the real estate bubble filled public coffers with property tax revenue. Public officials approved big public works projects such as a new arena, a waterfront park and a grand, new city hall building that the city government never had the money to occupy. But even this spending pales in comparison to Stockton’s crippling public employee contracts. The city is on the hook for more than $800 million in unfunded liabilities for pensions and other post-employment benefits.
“We’re saddled with this debt that we don’t have the revenues any more to service,” says Stockton’s Vice Mayor Kathy Miller.
Miller lays much of the blame at the feet of former city manager Dwayne Milnes, who she says was tired of dealing with public employee unions and who, through his loose accounting, enabled city council members to give in to nearly every union demand.
“[The information] was not always accurate. And in some cases, I think it was almost misleading,” says Miller.
Milnes now runs an association representing the interests of the city’s retired public employees, which opposes cuts to some of the very benefits Milnes now admits might have been a mistake to approve. Milnes believes that Stockton would be broke regardless of the decisions made in the ’90s.
“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 that they can’t support it?'” says Milnes.
Reason Foundation senior analyst Adam Summers says that Stockton’s story is becoming an increasingly common one for cities across the U.S.
“There’s a real kind of moral hazard, whereby [city officials] have incentives to offer goodies to people, knowing that they won’t have to bear the costs of those decisions,” says Summers.
In Stockton, residents, taxpayers, and retirees are bearing the costs of short-sighted political decisions. Stockton’s general fund, meant to be for basic city services such as police and fire, has been gutted by the poor fiscal decisions, resulting in a 26-percent reduction in city police. Last year, a record 58 murders took place in Stockton. This year, they’ve already had 34.
Stockton officials hope bankruptcy proceedings will allow the city to opt out of some of its more stifling contracts (PDF) and to avoid repaying all of the bondholders while maintaining some money in the general fund to keep its most basic city services. Such a solution might give Stockton some breathing room but most of the hard work of rebuilding the town’s economy, tax base, and creditworthiness is still ahead of it.
This much is certain: With cities across the country locked into expensive long-term contracts, Stockton’s title as the largest U.S. city ever to go bankrupt might be short-lived.
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Written and Produced by Zach Weissmueller.