Stockton, California could become the largest city to declare bankruptcy in the US. On Tuesday the city council voted to skip $2 million in payments on $320 million in bonds. The bond insurer has promised to pay creditors in the event that the city cannot.
Now Stockton is in mediation. A new process, mediation is the result of AB 506, the intent of which is to slow bankruptcy proceedings by requiring all affected parties (debtors, creditors, unions) to meet and hammer out deals with a neutral party.
According to The Los Angeles Times, the city council is working on a restructuring plan. Since 2010 the city has twice declared a fiscal emergency. Pressure on city finances from rising health care benefits and debt associated with development projects have coincided with a period of depressed revenues and weak economic activity. Stockton has the second-highest foreclosure rate and eighth highest unemployment rate in the nation, reports Bloomberg News.
How the city reorganizes its finances is surely to be driven by the politics of unions and pension reform. The city faces a $417 million unfunded liability for employee health care benefits. How could that be allowed to happen? As a local city official tells The San Francisco Gate: “The problem is, nobody asked the question: ‘How do you fund it?’ And consequently there was no money set aside to fund those commitments,” Deis said. “It was an unsound decision and it has similarities to a Ponzi scheme.” Unfortunately, Stockton is not unique in this regard. Nearly all public sector health care benefits in state and local governments are unfunded.
In addition to its retiree health care costs, Stockton is paying 94 retired police pensions of $100,000 per year. As already accrued benefits, it’s not clear that the city has much room to modify this portion of the budget. And in fact, the police union is suing the city for reducing benefits. Another lesson in the importance of clear-eyed budgeting comes from Stockton’s troubles. Officials were caught off guard by the city’s sudden shortfall in part due to accounting gimmickry which included double-counting parking ticket revenues and overstating the city’s balance by $2.8 million.
The former administrators will not receive severance packages but they will collect pension benefits.
Mr. Rizzo will collect $650,000 a year making him the highest-paid beneficiary in the state’s pension system.
What is interesting is how they got their pay raises. The Los Angeles Times reports that the Bell City Council exempted themselves from state salary limits when they placed “Measure A” on the ballot in 2005 to change the city to “charter status” in a special election that only attracted 400 voters. Since passage, salaries for council members, who serve part-time, shot up by 50 percent to at least $96,996 a year.
The reason for the sudden switch was a state law passed in 2005 that limited the salaries of council members in “general law” cities. A law that itself was prompted by outrage over the pay of officials in South Gate, California.
Even more interesting is that Measure A didn’t bypass salary limits for serving on city councils. Instead, it gets around the salary limit imposed on boards and commissions. The City Council members receive $150 a month for council service, and $7,873.25 a month for serving on the Planning Commission, Surplus Property Authority, and the Solid Waste Recyling Authority.
The headline reads, “State budget deal depends on borrowing, accounting tricks, and gimmickry.”
Which state is it?
In this case, California; the headline is from the Contra Costa Times. On Monday night the state made a deal to close its $26.3 billion deficit; the package includes $15 billion in spending cuts, and $11 million in accounting gimmicks, borrowing, and overly optimistic assumptions. These include:
$2 billion borrowed from local governments’ property tax revenues (to be repaid with interest in 3 years),
$2 billion in cuts to local transportation and redevelopment funds,
$9 billion in payment deferrals to education, and
Deferring state employee’s paychecks by one day – essentially putting $1 billion in salaries on next year’s ledger.