By Wendi Maxwell, Guest Contributor
My city, Stockton California, is beginning mediation with its creditors to try to forestall becoming the biggest city in the US to declare bankruptcy. Stockton’s financial crisis didn’t just come along overnight, and we’re not the only California municipality facing possible bankruptcy. Here in town, as we proceed, the questions on everyone’s lips are “How did this happen?” and “Who’s to blame?”
Recent articles in The Record (Stockton’s daily newspaper) list the major decisions that impact our recent finances. Four costly decisions center on retirement and health care benefits. Three are bonds for redevelopment projects, including the sports arena, ballpark, and marina. At the time, these decisions provided a sense of excitement. A few years later though, we all mourn the results of these financial decisions.
But our city is not unique in having invested in infrastructure projects during the boom times, nor are we unique in investing in strong wages and benefits for our employees. Cities all over California, and across the nation, face similar problems.
Financial trouble all over the US
Before we use our 20/20 hindsight to condemn any decisions made in the past, let’s remember the financial climate in the state, and the US in general. During the early years of this twenty-first century, the world was awash in money. Stocks and bonds were skyrocketing; housing prices increased by double, then three times their purchase price. Construction and property sales were booming; tax revenues were pouring in. Nationally, we increased debt like there was no tomorrow. At the state level, we did the same thing. And in Stockton, we simply followed everyone else’s lead. Surprisingly, no one predicted an end to the prosperity.
Michael Lewis, in his recent book “Boomerang: Travels in the New Third World” traces the financial health of American states. Between 2002 and 2008, the US spent as freely as its residents, (who bought new houses, then when the value increased, got a second mortgage so they could buy a new car). States and cities did the same thing. Indebtedness across the US doubled, and spending grew by two-thirds. States also systematically underfunded their pension plans, depending on stock market growth to fuel future-funding for pensions. When the stock market dropped, pension plans dropped accordingly. Even though the Federal Reserve promised to keep interest rates at zero, states continued to build in an eight percent growth factor for their pension plans. And a few years later – guess what? There’s not enough money to fulfill the pension obligations.
When asked however, Whitney said she didn’t see a risk of states defaulting on their loans because states have the ability to push their financial troubles down onto the counties and cities. As time progresses, we’ve seen Whitney’s forecast of pushing the problem onto municipalities to be increasingly accurate. Lewis, in “Boomerang” reports asking Whitney for her opinion on the fiscal state of the states. “So what’s the scariest state?” Whitney came back with an unequivocal answer – “California.”
Is California the US’ Greece?
Over the past several decades, California has continued to do what it does best – satisfy Californians’ needs for more of everything without creating any new revenue streams. In 2011, the average Californian had debts of $78,000 against an income of $43,000. The state’s finances were in similar shape. We spend far more money than we take in.
Not only do we spend too much money, but many people feel the state’s priorities are increasingly at odds with its residents’ values. We spend more money on prisons than we do on colleges. Costs for the prisons are borne by the taxpayer, while costs for the colleges are increasingly borne by the students. California spends $6 billion for fewer than 30,000 prison guards and employees to incarcerate 170,000 inmates. According to the Legislative Analysts’ Office, that cost per prisoner averages $47,000 each year. Compare that to spending on education. Local school districts get by on an average expenditure of $11,000 per student, while Community Colleges are funded at a measly $5,000 per student, state colleges at $7,000 per student, and state universities slightly more at $12,000 per student. (In 1980, students at the prestigious University of California campus at Berkeley paid $776 a year in tuition. Today they’ll pay $13,218.)
The state’s revenues are notoriously volatile. In “Boomerang”, Governor Schwarzenegger recalls the budget season of 2007. He’d finished budget negotiations and managed to present a balanced budget - after involving some complicated accounting maneuvers - when an aid walked into his office and announced that tax revenues were down by $300 million for the month. The following month, revenues fell short by $600 million; and the following month revenues were short a billion dollars. Cities all over California were facing the same dilemma of rapidly dwindling revenue.
California’s convoluted rules for decision-making assure that no significant change of course can be enacted. California has highly partisan legislative districts, with equally partisan representatives. (New redistricting maps may improve this situation.) California citizens require its legislature to assemble a two-thirds majority to enact any new tax measure or significant spending decision.
And in case the highly partisan legislature should find a way to come to agreement on any of those financial decisions, the voters can trigger the initiative process and undermine or overturn the decision. Finally, term limits make it impossible for legislators to serve in the state legislature long enough to grasp the intricacies of the California legislative process. What do you get? – a recipe for insufficient revenue and few limits on spending.
California has long been the precursor of social and economic trends across the US. What’s the latest trend? Municipal insolvency. Cities are in so much trouble in California that we’ve passed a law urging cities and their creditors to enter into mediation, trying to short-circuit municipal bankruptcy. Other states would do well to pay attention to California’s fiscal health.
What do you do when a state has no income?
Since it couldn’t increase revenues without being hamstrung by either the Legislature or by voters, the state had no choice but to cut services. What did the great state of California do to keep from going under? It laid off employees, required furlough days, renegotiated contracts, cut aid to poor, homeless, the disabled and the elderly, and even closed state parks. That was only the tip of the iceberg however. California pulled state money that went to local governments and put it back in the state’s general fund. It “borrowed” some funds, and delayed payment of others, while local municipalities incurred fees from having to borrow money.
This fall, Governor Brown pushed for, and won approval to dismantle the state’s Redevelopment program, which provided money for cites and counties to undertake infrastructure programs. (Examples of redevelopment projects range from low-income housing projects to downtown redevelopment to sports arenas to police officer salaries.) And although redevelopment money does not typically underwrite an entire project, it provides enough financial leverage for cities to seek out bond measures. When the redevelopment money dried up this fall, cities were left scrambling.
And in case that wasn’t enough, another blow was falling. In 2011, the US Supreme Court upheld a decision by a lower court stating that the overcrowding and poor medical care in California’s prisons constituted cruel and unusual punishment. The state was ordered to build additional prisons, or release prisoners. The state’s choice – either release or send to the county jails the 30,000 excess prisoners. Now the counties are bracing themselves for an influx of transfers from prisons to local jails. Although the state has said it will provide counties with incarceration costs for those prisoners, there’s no additional money to increase the capacity of the jails, nor has there been any money for the social cost of the increased prisoner load. In short, cities and counties continue to give money to the state (sometimes willingly and sometimes unwillingly), while at the same time, the state pushes many of its fiscal problems onto local municipalities.
Is Stockton the only city facing possible bankruptcy?
Well, no, Stockton’s not the only city in trouble. San Jose CA, located in the tech-rich heart of the Silicon Valley, boasts the highest per capita income of any city in the US after New York. Its Standard and Poor’s credit rating is AAA, partially because its bondholders have the right to compel the city to tax property owners to pay off the bonds. And right now, San Jose’s in trouble too.
Part of the problem for most California municipalities has been the increasing cost of public safety employee salaries and retirement benefits. For several years, cities engaged in competitive bidding for police and fire services. Whenever one city negotiated salaries and benefits for police or fire, other cities found themselves using those increased rates as the starting point for their own negotiations. Salaries and benefits inched higher and higher.
And assertive unions and kind-hearted human resources directors (or finance directors, or city managers, or mayors, or council members) pushed for similar benefit and salary increases for the remainder of the city’s work force, so that janitors and clerks didn’t get left too far behind. After all, there was plenty of money…
The result? There’s not enough money to pay the cities’ bills and pay their employees. City employees throughout California have taken pay cuts, and enforced furlough days. Many have lost their jobs entirely. City services such as maintenance on parks, streets, trees, have been drastically reduced, if not cut entirely. Human services programs have been hit hard. Grants to community non-profit agencies have dwindled. Library hours are drastically reduced, at a time when unemployed workers need library computers and GED prep books more than ever. (Oakland proposed permanently closing 14 of 16 library branches last summer, until protests helped them rethink that Draconian response.)
How did all these cities get into so much financial trouble? They got into trouble the same way as San Jose, and Stockton, and California, and much of the rest of the US. Everyone believed that the good times would last forever. As San Jose mayor Chuck Reed puts it, shaking his head “We’ve suffered from a series of mass delusions… We’re all going to be rich. We’re all going to live forever…”