On June 28, Stockton became the largest city in California to file for bankruptcy. And it will not be the last.
The Stockton City Council’s decision is more than merely a legal tactic to amortize debt and manage its troubled finances. It is a profound humiliation, an admission that over the last 15 years, Stockton’s leaders have mismanaged the city’s money, despite state laws requiring them to balance their budgets. But the spending and long-term commitments that lead the city to financial ruin are not isolated, and municipalities statewide should take notice.
Starting in the late 1990s and running through the early 2000s, California was coasting through an astonishing, seemingly indefinite, economic boom. The dot-com craze was flushing investment capital throughout the Bay Area, and many people were getting rich. Housing prices were booming, and so were the tax revenues, including property taxes on houses whose values shot skyward. City halls were flush with cash.
But as Stockton’s coffers filled, it didn’t use the money to repair and rebuild the city’s aging infrastructure — a one-time expenditure that would last decades. Nor did the city’s leaders sock the money away in case of a future recession. Instead, the City Council agreed to hand out cash on the barrelhead to its employees, in the form of exorbitant pension increases and retiree health benefits — both of which were long-term commitments.
During the boom, public safety workers were given a contract that allowed them to retire with benefits that amounted to up to 90 percent of their final salary, for as long as they lived. And they could retire as soon as they were 50 years old, living 30 more years on their most lucrative pay base.
City employees also sought wage increases, starting with firefighters. Instead of pay hikes, city leaders negotiated to give the firefighters full health care once they retired, starting Jan. 1, 1996. Other city workers demanded and received the same benefit the next year.
At the time, the thinking was to contain wages, but the shortsighted plan counted on a healthy stock market and a low inflation rate for medical costs. Both proved incorrect. The folly of such thinking is now obvious. The dot-com bust was a mere blip when compared to the catastrophic collapse in the housing market that followed years later. Stockton now faces roughly $1 billion in long-term debt.
Of course, the spending spree in Stockton was also aided by politicians from both parties and voters who approved unwise bond measures. But the pension and health care mess there was not uniquely foolish. All across the state, from San Francisco to Oakland and Los Angeles, city leaders followed the same pattern, handing out unrealistic pension and health benefits to city workers at a time when the money was rolling in. And the city’s unions were only too happy to take the money.
These bills are coming due all over California. Stockton is just the beginning. More bankruptcies are coming. Stockton should serve as a wakeup call for cities and counties, as well as the state itself, that deferring payments now still means we have to pay the bill later — sometimes with disastrous results.