Stockton a future trend? Bankrupt California city can’t pay its bills

The central California city of Stockton, a river port of 290,000, last week filed for Chapter 9 protection, making it the largest American city ever to declare bankruptcy.

Thousands of new homes mushroomed in Stockton during the end-of-century construction bubble. When the housing boom collapsed, the foreclosure rate in California’s agricultural heartland became the second highest in the nation. (Las Vegans know who was first.) Stockton’s property taxes and other revenues declined sharply, while expensive investments and generous retiree benefits drained city coffers.

The city is one of less than a half-dozen larger governments to seek Chapter 9 protection in U.S. history, according to James Spiotto, a Chicago bankruptcy attorney. Chapter 9 has been used sparingly and mostly by small government entities such as water utilities, Mr. Spiotto said, because of fears the filing can limit a city’s “ability to fund capital improvements and build infrastructure.”

However, “one of the reasons a city might want to go the bankruptcy route is that they don’t want a situation where they have to pay out debts and have to close the police or fire department,” explains Robert Benedetti, professor of political science at the University of the Pacific in Stockton.

Stockton’s City Council last Tuesday approved a budget-in-bankruptcy that plugs next year’s anticipated $26 million deficit by suspending debt payments, reducing payments for retiree medical benefits and increasing revenue through code enforcement and parking citations, among other measures.

The most important question here, though, is voiced by Mr. Spiotto, the bankruptcy attorney. “People will be watching,” Mr. Spiotto said. “Is Stockton just another aberration, or is it a growing trend?”

Most municipal workers do important jobs and work hard. They deserve decent pay. But there still seems to be widespread belief, including here in Nevada, that once we’re past the current economic bump in the road, the tax-funded wages, benefits and pension promises can return to the kind of ski-slope growth seen in recent decades.

In fact, if future public-sector pension and health benefits already promised are properly accounted for – without pie-in-the-sky projections of future revenue growth and investment returns – many more American municipalities may be fiscally unsound, already. Without a re-examination of public-sector pay and benefits, Stockton may just be the beginning across the country.

That’s why these obligations increasingly are referred to as “unsustainable.”

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