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How will bankruptcy affect Stockton, Calif.?

Cars drive through downtown Stockton April 29, 2008 in Stockton, California. As the nation saw widespread home loan foreclosures, Stockton, .California led the nation with the highest foreclosure rate. One out of every 30 homes in Stockton is in foreclosure, close to seven times the national average for a metro area in the U.S.
Justin Sullivan/Getty Images
Cars drive through downtown Stockton, California.

The city of Stockton is following in the footsteps of millions of cash strapped Americans and filing for bankruptcy.

The city of Stockton is following in the footsteps of millions of cash strapped Americans and filing for bankruptcy.

In a 6-1 vote last night, the Stockton City Council adopted a special budget plan, to govern spending once under bankruptcy protection. Stockton is the biggest U.S. city by population to take such drastic financial measures, with an expected budget shortfall exceeding $20 million.

Under the bankruptcy plan, payments for debts and legal claims will be suspended, while retiree medical benefits payments will be reduced. No further cuts are expected to staffing levels of Stockton's police force, fire department or other city employees.

L.A. Times central valley reporter, Diana Marcum, says that although Stockton’s problems can be seen in other cities around the state, it is also something unique to the Central Valley.

“It wasn’t just all of these investments and this perfect storm. There are underlying reasons. It’s an [agriculture] economy, it’s not as diversified of an economy as other parts of California, there’s a lot of entrenched poverty, there’s a lot of segregation of neighborhoods,” said Marcum on the AirTalk. “I mean there are problems that go all the way back to the dust bowl.”

Despite these unique circumstances, most analysts and academics expect that Stockton will not be an isolated case of a larger California city filing for bankruptcy.

“In terms of its problems, it’s not a one off,” said John Ellwood, Professor of Public Policy at UC Berkeley. “It is representative. It will obviously be an individual decision on the part of each government whether to go the bankruptcy route.”

Joe Nation, Professor of the Practice of Public Policy at Stanford University says that we are probably only seeing the tip of the iceberg if significant reforms are not made both on the spending side and the revenue side.

Former Los Angeles mayor Richard Riordan foresees the City of Los Angeles as one of the places that may be forced to file for bankruptcy in the near future, ““Unless they can make major changes in their union contracts and pensions and health care,” said Riordan. “I predict they would have to go into bankruptcy by 2015.”

No one can say with certainty how the Stockton bankruptcy will go, according to Marcum. The goal of the city is to protect the services they have while they are in Chapter 9. It will be up to the courts how the city is allowed to restructure.

What about pensions and healthcare?

A major point of contention is the issue of pensions which, under current California state law, are guaranteed.

“But what happens if the system doesn’t have the money? Under current law, think about start selling oceanfront property, Santa Barbara, San Diego because that is current law,” said Elwood. “However, you know that what’s gonna happen is there are going to be a series of cases where individuals and governments are going to go to the courts and say ‘We can’t do that anymore’...Now traditionally that’s what happens when you go to bankruptcy courts,”

The City of Stockton recently went from spending $10 million a year on pensions to the latest number showing the city spends $33 million per year on pensions, according to Nation.

“The school districts are way underwater now...If you look at their health care, their pensions, and a bunch of other things. They are far underwater...If you look at the Governor’s increase in taxes and his initiative. He says that the money is going to go to education but that’s misleading because none of it is gonna go in the classroom, it’s all gonna go toward pensions,” Riordan said.

Professor Nation says the solution is for cities and counties to sit down at the bargaining table with unions to try and pension and retiree benefit issues.

However, it is not just pensions that are causing many of the problems within struggling California cities. Health benefits are another concern that the Stanford University Professor has with ongoing city crises all over the state.

“I know that in Stockton, one of the concessions the city made years ago to the unions, was that an employee would get retiree health benefits after one day on the job...That’s just insane,” Professor Nation concluded.

On the issue of retirement age

The age of retirement is the biggest concern for Huntington Beach Mayor Pro Tem Devin Dwyer. His city is currently underfunded by $311 million.

“We’re allowing [city employees] to retire too early and then a lot of these employees go back and they contract with another city and go back to work and do the same thing. And now they’re getting their pension and they’re getting paid to do their work,” Dwyer said.

For many cities, 50 is the age of retirement which is in contrast to the private sector which sees retirement ages closer to late 60s, depending on when you were born.

Raising taxes are an option, but a tough sell

Professor Nation sees raising revenue through taxation to be a tough sell to an electorate.

“I would say for voters it’s very tough for voters anywhere in California whether it’s Stockton, or statewide to say yeah we’ll throw more tax money at a broken system because the pension system in this state is broken.” Nation says.

Proposition 13 also causes problems for many cities hoping to earn more money through property taxes. It is a hot button issue that many politicians are afraid to tackle, according to Nation who was a former legislator.

The future for bankrupt cities

Ultimately, for cities who choose to go into bankruptcy their future lies in the courts. The city of Vallejo, Calif. filed for bankruptcy in 2008 and was able to restructure its pension contracts and was released in 2011.

“It very much depends on what the courts decide in terms of, particularly pensions and health care contracts, whether those will stay and under what conditions they will stay,” Ellwood said.

Weigh In

Stockton is one of just thirteen municipal bankruptcies to be filed in the United States in the past year. Do you question how a city can get into such a financial mess? If you have roots in Stockton, what are your concerns about how the city will be perceived?


Richard Riordan, former mayor of Los Angeles

John Ellwood, Professor of Public Policy, Goldman School of Public Policy, University of California, Berkeley; specializing in financial management and public sector budgeting; board member, California Budget Project

Diana Marcum L.A. Times reporter for the central valley

Joe Nation, Professor of the practice of public policy at Stanford University

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