On June 26, the Stockton, California, City Council voted 6-1 to adopt a spending plan for operating under bankruptcy protection, and to file a motion with the courts to share information from the confidential mediation. With almost 300,000 residents, Stockton is the largest city to file for bankruptcy in U.S. history, which begs inquiry as to how the municipality reached this point, says Harris Kenny, a policy analyst at the Reason Foundation.
First, only modest investigation finds that the housing bust was particularly harmful in Stockton.
- Housing prices plunged from nearly $400,000 in median home prices in 2006, down to $110,000 in 2009 (where median prices were in 2000 before the bubble.)
- Meanwhile the city has the second highest rate of foreclosures in the country.
- As a consequence, property tax revenues plunged rapidly, and the subsequent recession caused sales taxes, utility user's taxes and housing permit fees to fall as well.
- The city quickly burned through emergency cash reserves in order to cover its deficits, along with implementing a hiring freeze in 2008 and various spending cuts, but to no avail.
Second, the city's policymakers appear to have mistaken the real estate bubble for real growth, which gave them excessive optimism about future finances.
- This reported optimism led to breakneck pace spending on various redevelopment initiatives.
- The city sold $129 million in bonds to fund rehabilitating the Philmathean building, the downtown marina and waterfront's development, and the Hotel Stockton.
- The city also renegotiated generous compensation for city employees, when employee services compose approximately three-fourths of the city's almost $200 million budget.
- This generosity resulted in lavish annual raises and excessive post-employment benefits; the latter has resulted in $800 million in unfunded liabilities.
Third, the city was unfortunate in initiating a bond offering that went sour.
- In 2007 the city sought to lower its pension costs, so policymakers undertook a bond offering to lower interest payments on roughly $125 million of its pension obligation.
- The proceeds of these pension obligation bonds were given to the California Public Employees' Retirement System (CalPERS) to manage.
- Crucially, CalPERS was overexposed to the real estate and stock markets: the bond money is now worth under $100 million while the city owes $248 million.
- Increased debt payments, combined with multiple years of negative net annual activity, ultimately pushed Stockton over the edge.
Source: Harris Kenny, "What Happened in Stockton?" Reason Foundation, June 27, 2012.
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