Few non-local people pay much attention to the goings-on in
Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000
that sits in the agriculturally rich San Joaquin Valley at the
eastern edge of the California Delta. But bond-holders, taxpayers
and government officials throughout the country will be listening
to U.S. Bankruptcy Judge Christopher Klein’s expected ruling on
Monday as he decides whether the city may remain in bankruptcy and
pursue a plan that stiffs its bond-holders.
If Klein sides with the city, then municipalities will face a
disturbingly low bar for pursuing bankruptcy. They will be
emboldened to choose Stockton’s course—i.e., using bankruptcy as a
strategic policy tool to offload debts without having to confront
the main reasons that they went bankrupt in the first place, such
as lush pensions. Bankruptcy will no longer be a policy of last
resort. This should have an impact on bond markets.
If the city wins the case, argued March 25-27 in the Sacramento
federal courthouse, then the public-sector unions and the
scandal-plagued California Public Employees Retirement System are
right. No matter what problems befall a city, public services and
taxpayers suffer first while union members and public retirement
systems are protected.
Granted, no one should feel too sorry for the lenders (and their
insurers) who provided the pension-obligation bonds to the city.
They knew the risks when one lends money to a city—especially one
controlled by the unions. But their argument is strongest. A city
shouldn’t use bankruptcy as a means to get rid of uncomfortable
debts. It should use this tool only when it has slashed its costs
but still can’t get out from under the load.
On Tuesday, a Stockton management consultant called at the trial
stated that the city would have a $100 million budget deficit in a
decade if it does not take the bankruptcy route, in an attempt to
show that it had no choice but to declare Chapter 9. But how hard
has the city tried to deal with its debts?
As the attorney for the bond insurer noted in his closing
comments on Wednesday, the city intended, from the outset of this
process, to shortchange the bond holders. It has refused to address
its biggest debt—the payments that it owes to CalPERS to pay for
its pension obligations. It only modestly pulled back compensation
from rates far above the market to somewhere near the average for
public-sector workers in California.
Essentially, the city plan has put pension debt off the table,
arguing that pension payments and benefits cannot legally be
touched. A bankruptcy would be the place to challenge that
assumption, but Stockton officials have no interest in doing so,
figuring it’s easier to go after Wall Street than the unions. If
Stockton gets its way, then cities can spend anything on pensions
and there is no way to ever get out from under that debt.
Some of the most telling testimony came Wednesday morning, when
bond-insurer Assured Guaranty’s attorney Guy Neal questioned city
councilmember Kathy Miller about a July 2012 video that explained
the fiscal situation to city residents. Here are some of her
statements from the video:
In the 1990s, Stockton granted its employees some of the most
generous and unsustainable labor contracts in the State of
California.… Safety employees could now retire at the age of 50.…
Many safety retirees today earn 90 to 100 percent of what they made
when they were still on the job.
That's common. But Miller noted that:
Stockton went even further than most other cities and granted
things like unlimited vacation and sick time that could be cashed
out when an employee retired, and added pay categories for almost
everything imaginable.… Our public safety employees were costing us
on average more than $150,000 a year each. That’s three times more
than most of us in Stockton make in a year.
She described the “Lamborghini” health plan the city’s employees
received:
This was free medical care for a retiree and a dependent for the
rest of their lives. No co-pays, no generic requirements, no HMOs,
and no premiums. See any doctor, stay in any hospital, purchase any
drug, and just send the bill to the city of Stockton.
Absurd pay and benefits are common, and not just in Stockton.
San Francisco Chronicle columnists Matier and Ross revealed
recently that the Alameda County executive receives a $423,000 a
year pay package for life. Compensation for California firefighters
is in the $175,000 a year range. Some Newport Beach lifeguards
receive $200,000 a year pay packages. As a friend of mine joked,
revolutions have been fought over lesser instances of public
pilfering.
Stockton pulled back on some abuses, but has left the main
problem in place. Why is it OK that Stockton residents have to put
up with closed parks, reduced policing and other cutbacks to
protect outrageous pension and pay levels?
Currently, Stockton leaders are floating a tax increase plan to
fund police officers. But money is fungible so this should be
viewed as a tax designed to pay for past boondoggles. Whatever the
court decides, it’s time for the public to stand up to these
misshapen priorities.
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