By Wendi Maxwell, Guest Contributor
(Wendi Maxwell brings personal insight and occasional stories from California. Maxwell is a former policy maker for California adult literacy projects.)
My town, Stockton CA, is an agricultural and shipping hub with an inland port about 80 miles east of San Francisco. At 292,000 people it’s the 13th largest city in California. (Ironically, our population is the same size as Iceland – site of an earlier financial meltdown.) But that’s not why we’re in the news; we’re currently staring bankruptcy in the face.
The banking industry uses the term “under water” to refer to homes whose value is less than the amount owed on the loan. Our houses are not only under water, but our city is too.
We’re used to headlines slamming our city, and we’ve learned to keep a sense of humor about it. If we’re not heading Forbes’ “Most Miserable” list, we’re named the “foreclosure capitol of the world.” We have low levels of literacy, high drop out rates, and a 19 percent unemployment rate. We know we have problems and we have taken dramatic measures to change things, but the hits just keep on coming. Now we’re making new headlines as the first city to test California’s Assembly Bill 506, designed to forestall cities from slipping into bankruptcy.
Stocktonians have been here since the Gold Rush, and we still love our city. Unlike the picture painted by the horror stories, it’s a beautiful place, lined with trees, and laced with waterways and public parks. We go sailing or fishing out our back doors year round, and drive a couple of hours to ski in the winter. We cheer our championship minor league hockey and baseball teams. We’re proud of our downtown redevelopment, our colleges and university, our museum and symphony, our diverse cultural heritage. We have fresh fruit and vegetables all year round, picked ripe from the fields on the edges of town. We’re awash in outdoor festivals with live music and food. We greet each other on the streets and laugh about the hard times. This month though, we’re shell-shocked.
I spent last Tuesday night watching the live broadcast of the Stockton City Council while they reviewed the appalling state of our city finances. After six hours of financial information, the Stockton City Council declared a state of fiscal emergency (the third year in a row), and voted to suspend debt payments for the rest of the year. With this decision, the city will formally enter into mediated negotiations with its creditors under new legislation created in January 2012. The process is designed to prevent cities from having to declare bankruptcy. (Note: California is one of nineteen states where municipalities can legally file for bankruptcy.)
How did we get here?
Beginning in the mid-nineties and lasting almost a full decade, Stockton experienced an unprecedented boom. Construction exploded. The city issued 3000 building permits per year for four years in a row. Median home prices for our blue-collar town reached $430,000. Tax revenue increased. We were named an “All American City.” With the coffers flush with money, and with no one predicting the recession, city leaders invested in the city.
City leaders and developers embarked on large-scale redevelopment of the urban core, building a new ballpark and arena, establishing redevelopment zones to encourage investment in downtown, and entering into public-private partnerships for additional development. Although many city residents felt the Council was embarking on unnecessary (if not grandiose) plans, there was a sense of promise and excitement. The signs of better times are easy to spot: the lovely marina on the San Joaquin Delta, the gleaming waterfront sports arena and ballpark, and a handsome high-rise meant to house a new city hall.
The city also negotiated contracts with employee unions improving their retirement and health care benefits. Since many city employees are not eligible for Social Security, limiting raises for the promise of health care in their retirement was a good deal. No one seemed to disclose how much it would cost over the long run.
And then the bottom fell out.
Recession
Like many others, Stockton leaders assumed that the boom times would extend indefinitely. When the recession hit, Stockton was deeply impacted. The “All American” city became an example of the new America – out of money and struggling to keep afloat.
Building permits dropped from 3000 a year to 150. Carpenters, plumbers, and furniture stores found themselves with no income. After the construction market collapsed, the foreclosures started.
Sales of houses plummeted, and the prices fell dramatically - from $430,00 to a median sales price of $114,000. During the height of the foreclosure crisis, one in 17 home sales in Stockton resulted in foreclosure.
Property tax revenues plunged as homeowners defaulted on loans. Businesses laid off employees, and because unemployed people have little income, discretionary purchases fell, and sales tax revenues declined.
Where are we now?
Over the past three years, city leaders have scrambled to deal with the loss of revenue. Employee bargaining units made deep concessions in their contracts, taking furlough days, pay cuts, and reductions of their retirement and benefit packages. Massive numbers of employees lost their jobs. The City Council declared a “fiscal state of emergency” two years in a row, which allowed the imposition of cuts to bargaining contracts after negotiations failed. Relations between city employees (particularly fire and police) and the City Council and manager, are severely strained.
The city had committed itself to compensation packages it can no longer afford. City leaders in the 1990s (most of whom no longer live in town) apparently thought the economy would continue to increase year after year. The bond payments for the redevelopment projects increase each year.
Now the city finds itself unable to meet its financial obligations. As the city’s revenues decline, its obligations to existing and retired employees continue. The ratio of retirees to employed city workers has shifted, as more employees choose to retire rather than stay with the decreased labor force. The city’s financial obligation to retirees is greater than its obligation to current employees.
We are now operating with so few employees that city services are severely compromised. Crime has increased, and the city experienced a record number of homicides last year. (Billboard courtesy of Stockton Police Department.) Citizens are frightened and angry. We have lived through years of deteriorating city service, and seemingly unending bad financial news. Things don’t seem to be getting any better.
AB 506
And this week the bad news continued. City leaders declared Stockton will soon be unable to pay its debts. Unless something drastic is done immediately, the city will face bankruptcy. There’s not enough money to make it through June. Although city leaders cut $30M last year to arrive at a balanced budget, costs have increased and revenue has declined, leaving a $15 million deficit for the 201—12 fiscal year. And even if the city manages to come up with an extra $15M by June, forecasts show next year’s deficit at $20 million (best case) to $38 million. Worse still, the city’s deficit will continue to increase for many years in the future due to increasing retirement costs and escalating bond payments. Actions taken under the last two years of fiscal emergency slowed the bleeding, but did not solve the problem. There is no good news in sight.
All the fat has been cut from the budget. To follow the analogy, we’ve cut into the muscle, cut into the bone, and are now amputating full programs.
During the past three years, the city has stayed afloat by seeking and receiving deep concessions from employee groups. The new City Manager Bob Deis (left) has made it clear that we can no longer expect employees to bear the brunt of the needed economic cuts. When asked how many employees would have to be laid off to make up the money needed by June, Deis calculated that 600 employees (almost half the total workforce of 1400) would have to go. Clearly the city cannot continue to function in this manner.
At this point, the other major costs that have not yet been addressed are the bond obligations. Although city leaders might have tried earlier to negotiate new terms for the bonds, there would have been no incentive for the bond holders to negotiate. Now, with the city facing potential bankruptcy, the new legislation asks all creditors to participate in mediated negotiations to save the city.
Stockton will be the first city to test the new state law, Assembly Bill 506, which is less than 2 months old. It requires local government agencies to undergo mediation or hold a public hearing and declare a fiscal emergency before filing for bankruptcy. In February, after declaring a state of fiscal emergency for the third year in a row, the Council voted to enter into mediation under the AB 506 provisions. The mediation discussions will proceed over the next 60 - 90 days. If mediation efforts fail, we will be the largest US city to enter bankruptcy.
So what’s it like living through this?
I’m a pretty tough-skinned former administrator. I lived through the closure of Stockton State Hospital - putting 600 people (including myself) out of work, and closing an agency that had been around almost 150 years. I'm pretty good at absorbing bad news and moving on. But listening to six hours of financial reports detailing bad decisions combined with fiscal incompetence felt like one blow after another. There was no way to absorb the bad news bit by bit - it was just overwhelmingly, jaw-droppingly bad.
Over the past three years, our city council has made some very tough financial decisions. I’m sure this is not what they wanted when they entered public office. But they have spoken with one voice, and made the tough decisions that were necessary. I'm impressed by their intelligence and courage. They made the only decision that could be made, even in the face of angry audience members threatening their recall and accusing them of lying.
Stockton will be the first city to enter mediation under this new legislation. It's designed to forestall bankruptcy. We can only hope it works.
Images all taken from the Internet: 1) California “underwater;” 2) Map showing location of Stockton CA; 3)Downtown Stockton; 4) Default Warning; 5) Billboard posted by angry Stockton Police Union; 6) City Manager Bob Deis; 7) Stockton City Council in session.