Bankrupt cities, out-of-control costsJuly 12, 2012
Stockton, California recently filed for bankruptcy because of out-of-control retirement costs. Back in the mid-90’s, in the middle of a stock market boom and on the verge of soaring real estate prices, the city decided that it would give firefighters full healthcare for life rather than pay increases. The next year, other public employees demanded – and received – the same deal.
Standard pension benefits ballooned as well. Police officers could retire at age 50, with generous benefits, while other city employees can retire at age 55 (compared to the majority of private-sector workers who cannot retire until their 60’s or later).
In less than 20 years, the city faced a $417 million liability but even as warning signs started to appear, public employees continued to get additional benefits, while the city spent money
in other areas as well. Wanting to “revitalize” the city’s downtown, a $47 million bond was issued in 2004 to finance an arena – which lost money. The riverfront was financed by $100 million in debt – and is now underwater. A $125 million pension obligation bond sold by Stockton in 2007 resulted in a 23% loss on its invested proceeds. To top it all off, the housing bubble burst and by 2009, a decade’s worth of housing price increases was erased.
So far this year, Stockton has missed $2 million in bond payments. The bankruptcy filing calls for the city to forgo about $10 million in additional debt payments this year alone, cutting employee compensation and getting rid of lifetime health care benefits for retirees. After months of talks with creditors, city manager Bob Deis said they were left with no other option but to file for Chapter 9 protection.
On Tuesday night, the city council of San Bernardino voted to filed for bankruptcyas well. They are facing a $45 million shortfall this year. If they do file, they will be the 3rd California city in recent weeks, joining Stockton and Mammoth Lakes.
Reality is catching up with municipalities and states – addressing these long-term structural deficits can no longer be avoided or ignored.