Stockton, California Nears Bankruptcy: Is This the Future of Local Governments?


California's sprawling, mostly agricultural Central Valley doesn't get as much limelight as its San Francisco and Southern California regional brothers. But in the past four years California's biggest city, Stockton, has made headlines for being the harbinger of nationwide travesties. The first of which was the housing collapse of 2008. The amount of sub-prime mortgages in the municipality and the subsequent aftermath led national newspapers to label Stockton "ground zero" for foreclosures. In 2011, the city won the distinction of "most miserable city in the U.S." for the second time in three years. Now, Stockton is the largest U.S. city staring down bankruptcy.

To be fair, it's not the first city to do so, especially in the financially dysfunctional state of California. Orange County -- home of Disneyland -- filed for bankruptcy in 1994, and the City of Vallejo recently emerged from bankruptcy in November.

Chapter 9, title 11 of the U.S. Bankruptcy Code is the avenue insolvent municipalities take when they can no longer pay off their debts. In the cases of Orange County, Vallejo, and Stockton pensions are to blame. At the beginning of bankruptcy in 2008, 80% of Vallejo's yearly budget went to paying off public sector benefits. In the OC's case, their county treasurer Robert Citron invested their pension fund in incredibly risky investments and derivatives, ultimately driving the county into the ground. With regards to Stockton, city leaders rode the housing market boom of the mid-2000s with irresponsible optimism, overpromising city workers generous pensions and benefits while borrowing an obscene amount of bond money to finance high-capital projects like a multi-use arena and ballpark.

There are two issues here. First, leaders weren't leaders. They passed the buck and weren't up front with their employees and communities. A Stockton councilman was caught saying that they shouldn't be held responsible for the risks they took: what an unbelievable thing to say. City leaders were entrusted with public money and they blew it.

Second, there's an underlying factor that is encouraging these leaders to fail. When you're a public employee getting great benefits, why would you care about the overall financial situation of your employer? When you're a voter/citizen that gets to enjoy the benefits of a ballpark or arena without having a tax increase, why would care about the fiscal responsibility behind the decision?

The cold hard reality is that you can't hold these Stockton leaders on trial, put them in prison, or fine them. They didn't break any laws or commit any crimes -- they were elected. We voted the bastards in, and we're not voting them out; we're letting them convince us that we can have our cake and eat it too.

Part I of a planned series covering public pensions and local governments facing bankruptcy.