Stockton, California: The Bleeding Edge of a Scary Economic Trend

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Stockton CaliforniaOn Thursday, Stockton, Calif., became the biggest U.S. city in history to file for bankruptcy. At the same time, it also became the new face of America's national budget battle. For while Stockton is relatively rare in facing budget troubles so intractable that they necessitate a Chapter 9 filing, its struggle to put its financial house in order illuminates the wider problems facing the entire country in the wake of the Great Recession.

Municipal bankruptcies are nothing new -- as The San Francisco Chronicle reported earlier this week, there have been 42 since 1981. In recent years, though, the number of bankruptcies has sharply increased; since 2008, 10 municipalities have sought court protection to help them discharge their debts.

Ending Up in Court

Towns, cities and counties end up in bankruptcy court for a variety of reasons: Desert Hot Springs, Calif., got there in 2001 because of a huge housing discrimination lawsuit, while Orange County, Calif., ended up filing due to an investment fund meltdown that eventually led to the prosecution of the county's treasurer. Millport, Ala.'s 2005 failure was the result of a loss of sales tax revenue, and Washington Park, Ill., went to bankruptcy court in 2009 when a topless bar successfully fought against the city's five-figure licensing fees.

But these day, more municipalities are declaring bankruptcy for a far less interesting reason: They simply aren't bringing in enough tax money. That was the problem for Vallejo, Calif., which ended up in court in 2008 because it couldn't afford to fund its employee pensions. The same thing happened to Prichard, Ala., in 2009 and Central Falls, R.I., in 2011.

And beyond a few minor details, that's what happened to Stockton on Thursday.

From Prosperity to Poverty

Stockton's problems began in the mid-2000s, with what appeared to be a massive windfall. From 2000 to 2006, property values went through the roof, flooding the city's coffers and promising a bright future. The city, flush with cash, borrowed money for huge building projects and agreed to employee contracts that guaranteed generous yearly raises. The future looked bright.

A couple of years later, the worm turned. Between 2006 and 2009, Bloomberg reports, property values fell by 70%, dragging down real estate tax revenues. The city found itself in a pinch: On one side, it had high-cost employee contracts and pensions; on the other side, it had falling tax revenues and no way to make up the shortfall. A 2007 bond issue only made things worse, as servicing the loan just added to the city's costs.

In California, cities like Stockton don't have the power to increase property taxes when property values drop, leaving them only one option to balance budgets: cutting labor costs. Over the past two years, the city has laid off 40% of its employees, 25% of its policemen, and 33% of its firefighters. Unfortunately, these layoffs have come at a high cost: Stockton currently has the nation's second-highest foreclosure rates, one of its highest violent crime rates, and a 20.1% unemployment rate -- more than double the national average. According to city officials, Stockton's public safety is at a "crisis level."

With no approval for a tax increase on the horizon, it doesn't look like these problems will go away any time soon. Bankruptcy -- Stockton's last hope -- will allow it to renegotiate many of its contracts and adjust its payment schedule for creditors. What it won't do is bring in more money, which the city desperately needs if it hopes to restore its municipal services.


An All Too Common Problem

Stockton's situation is hardly rare. Across the country, municipalities that tied their tax revenues to the real estate market are facing shortfalls. Some, like Vallejo, Calif., -- which filed for bankruptcy in 2008 -- were also tied down by tough union contracts, but plenty of towns and cities that didn't offer particularly generous deals to public employees are nonetheless now scrambling to make ends meet.

Even areas that have managed to keep their fiscal houses in order are feeling the blow back from the recession. For example, Birmingham, Ala., which has an outstanding credit rating, tons of cash, and a low unemployment rate, is facing fiscal problems simply because of its proximity to Jefferson County, which declared bankruptcy in 2011. And, while municipal employee layoffs offer short-term solutions, they don't address the longer-term financial problems. Renegotiating contracts will help many governments get closer to solvency, but without a significant increase in revenue, an ever-growing number of towns, cities and counties will find themselves joining Stockton in bankruptcy court.



Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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actuary81

Step #1 in cities getting their financial house in order:

Freeze all your DB Pension Plans and end retiree healthcare subsidies.

If that cannot be done, then outsource 90+% of all Public Sector workers .... as that ends the "employment relationship" and with it any further growth in pensions & benefits.

There are NO OTHER OPTIONS.

July 10 2012 at 5:12 PM Report abuse rate up rate down Reply
Hi Peg and Matt

The financila problems can be solved very easily. Follow the example of our forebearers. DO WITHOUT UNTIL YOU CAN AFFORD TO DO WITH. Stop spending money, years before you earn it.

July 07 2012 at 4:22 PM Report abuse +1 rate up rate down Reply
sgtdjusmc

public employees..the true 1 percent.

July 03 2012 at 5:06 PM Report abuse rate up rate down Reply
rtgarton

Yea and lets all vote for Obama again. This country is in a real mess.

July 02 2012 at 6:21 PM Report abuse +1 rate up rate down Reply
marine1942

Wow !! Wonder if B. Hussien Obama ever reads this stuff.
Probably doesn't have time flying around ******* money up, playing golf, and playing the clown on t.v.

July 02 2012 at 4:30 PM Report abuse +1 rate up rate down Reply
bill

YOU CAN BET THAT THE POL'S AND THERE CRONNEYS ARE NOT TAKING A HIT.THEY KEEP FILLING THERE POCKETS AND LAUGHING ALL THE WAY TO THE BANK.

July 02 2012 at 3:53 PM Report abuse +1 rate up rate down Reply
ficadoor

Government on taxes is EXACTLY likea ***** on cocaine. She just get's a taste of it (tax windfall / cocaine)- there's no going back. The habit gets worse and worse until it is no longer financially sustainable and everything goes tapioca. And of course, it's always the conservative's fault.

July 02 2012 at 3:32 PM Report abuse +1 rate up rate down Reply
silveysplastics

Its real simple, "GOODs and services must be paid for"
When the average wage of a government or in this case city worker exceeds that of the average citizens things can go down real fast. The fire chief whom retires and makes more than when employed, for example and better yet goes to work for another fire department, gotta love it.
Yes the economy tanked due to many factors, and blame can be equally shared by all whom took part. But as in my city, when one asks to read the budget, it is stated that this is complex and not understood by the common person due to state laws. Really, further if Stockton is like numerous cities, and counties they need to spend their monies by department each year so they can get more, otherwise it is a battle to get it as you didn’t use it last year why do you need it this year… and then there is always the projected income… which comes down to a very big guess.

July 02 2012 at 3:07 PM Report abuse +4 rate up rate down Reply
1 reply to silveysplastics's comment
rtgarton

Yea you should see what teachers retire on on Long Island. Like $80 plus their SS and medicare they are really sitting pretty. Something is wrong with these pictures.

July 02 2012 at 6:25 PM Report abuse -1 rate up rate down Reply
1 reply to rtgarton's comment
gmydogbud

Suggestion: Claw Back The Money From Those Politicans Who Signed Those Union Contracts. They Are The People Who Put The Citizens On The Hook For Those Benefits!!

July 04 2012 at 7:19 AM Report abuse rate up rate down
danbol1237

Once again Mr. Watson has stated the obvious, "without a significant increase in revenue, an ever-growing number of towns, cities and counties will find themselves joining Stockton in bankruptcy court". Brilliant observation Mr. Watson we all know that. The real question is where are they going to get the increased revenue? The taxpayers are broke too.

July 02 2012 at 3:00 PM Report abuse +1 rate up rate down Reply
1 reply to danbol1237's comment
marine1942

maybe cut the services would be better. We can live without trash pick up 3 days a week.
The library need not be open on Sunday.
The children's programs can be cut. Wow, maybe the parents could spend time with them.
Buses don't have to run as often.
And this will really upset the unions-----do you really need that many street sweepers, 3 men on a garbage truck, police administration, firemen who never have fought a fire, assistants to the mayor , 8 men to a road crew and pothole repair detail whe only two men have shovels ?

July 02 2012 at 4:30 PM Report abuse +1 rate up rate down Reply
viking9343

Stockton (and California) are bankrupt for just one reason.....Public sector unions.

Unions rig the elections to get thir canidates elected. The the elected politician "owes" the union for his/her job so they sign LONG TERM wage, helth abd benifits contracts screwing the tax payer for decades. basicly they get elected buying vote with tax payer money. It's that plain and simple.

To fix this problem two thibgs can be done.

1. Outlaw only PUBLIC SECTOR unions. There is no competeion for public services so these jobs should not be unionized in the first place.

2. Member of public sector unions should NOT BE ALLOWED TO VOTE. Basicly they are just voting themselves pay rasies and benifits.

July 02 2012 at 2:13 PM Report abuse +1 rate up rate down Reply