Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city's tax base
By 2009 Stockton had accumulated nearly $1 billion in debt on civic improvements, money owed to pay pension contributions, and the most generous health care benefit in the state—coverage for life for all retirees plus a dependent, no matter how long they had worked for the city.
Poor Stockton. Located in California where liberals think money grows of trees and are unwilling to do what is necessary to make the economy grow. If there were low taxes, low benefit expenditures, and friendly business policies, they might have been able to actually count on developer fees and increasing property tax value as everyone became richer.
SACRAMENTO, Calif. -- On its first official day in bankruptcy, the city of Stockton now must grapple with the hard part of reorganizing its financial affairs - how to share the financial burden equitably among creditors while meeting its massive state pension obligations.
At the conclusion of a three-day trial, a judge on Monday formally granted the city Chapter 9 protection, over the objections of creditors who questioned whether it was fair for the city to fully meet its obligations to the state pension system while other debt holders go partly paid.
The issue - whether federal bankruptcy law Trump's the California law that requires pension fund debts to be honored - could have huge implications across the state and the rest of the nation, experts say.
"The fear is that there is going to be a run on the bank," said bankruptcy attorney Michael Sweet, who has been monitoring the Stockton trial. "Everyone is going to be cutting CalPERS" payments if Stockton is allowed to do it.
California's $225 billion Public Employees Retirement System already is underfunded by $87 billion, which means there are more payments due to retirees than there is money in the system.
Stockton's biggest creditors insured $165 million in bonds the city issued in 2007 to keep up with CalPERS payments as property taxes plummeted during the recession. Stockton now owes CalPERS about $900 million to cover pension promises - by far the city's largest financial obligation.
Nearly two dozen California cities, from San Jose and Watsonville to San Bernardino and Compton, either are facing bankruptcy or financial emergencies - and their hefty pension costs are getting heightened scrutiny.
The risk was unmistakably clear when creditors lent the troubled city money during a borrowing binge.
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After a federal judge ruled last week that the city of Stockton can reduce its debt through bankruptcy, observers began to frame the battle as one of municipal bondholders against public employees. But it's hard to shed tears for either of them.
During the boom years, Stockton promised its future public-sector retirees free lifetime medical coverage. It also adopted rules allowing workers to spike their pensions by letting them include overtime and other payments from their final work year to calculate retirement pay.
The city also issued far too many bonds. From 2003 to 2009, on an annual budget of just $156 million, Stockton borrowed $191 million for a spending spree that included public housing, an events center and arena, parking garages and a new City Hall and police communications center.
The city also borrowed $125 million to make its required payments to the California pension fund. Yes, even during the boom years, Stockton could not afford to make its pension payments.
Since 2008, the average home price in Stockton has fallen from $407,000 to $118,500, which means that property and sales tax collections have fallen sharply too. The city has cut back severely, reducing its workforce by 25%, including deep cuts in the fire and police departments, and cutting worker pay and benefits. When it became clear that wasn't enough to balance the budget, Stockton last year suspended $2 million of its $13 million in annual bond payments.
In its bankruptcy filing, Stockton noted that "debt taken on … in the 2000s is simply not supportable given current economic realities without devastating current city services."
The city's position has those who invested in the bonds crying foul. A coalition of creditors, including municipal bond funds and a company that insures government bonds against default, tried to prevent Stockton from even filing for bankruptcy. They asserted that the city wasn't insolvent because it still had the ability to raise revenue through taxation or to cut even more deeply. They also said that Stockton hadn't negotiated in good faith.
Last week's ruling by U.S. Bankruptcy Judge Christopher Klein found that Stockton was indeed insolvent and that it hadn't negotiated in bad faith. As Klein put it: "It was the choice of the … creditors to take a position as a stone wall."
Investors are right to be nervous. The debt from which Stockton wants to free itself is not general obligation debt. That is, it doesn't carry the full faith and credit of Stockton citizens and taxpayers.
Seek freedom and become captive of your desires...seek discipline and find your liberty I can tell if a person is judgmental just by looking at them what is chaos to the fly is normal to the spider - morticia addams If you're not upsetting idiots, you might be an idiot. - Ted Nugent
For more than a decade, the California Public Employees’ Retirement System has behaved in extraordinarily irresponsible fashion, and now the damage it has done is coming into full focus.
In 1999, CalPERS persuaded the Legislature that a 50 percent retroactive pension increase for most state employees could be given away with little long-term cost to taxpayers. This was predicated on the bizarre notion that the stock market boom of the late 1990s would never end. The giveaway was copied by many local governments.
Over the past five years, as the unfunded liabilities kept growing for CalPERS’ clients — the state government and nearly 1,600 cities and local agencies — CalPERS not only denied it faced long-term problems, it went after media skeptics. A CalPERS executive denounced a 2009 Bloomberg News analysis as the work of “anti-pension ideologues.” CalPERS also started a website — calpersresponds.com — that continues to this day to distort the history and the dimensions of the pension crisis.
But CalPERS’ board is no longer pretending that its problems aren’t immense. Earlier this month, heeding its actuaries, the board moved to raise the amount it charges local government clients by about 50 percent over seven years, beginning in 2015. The numbers vary widely based on specific contract terms in local governments, but experts predict that pension funding costs will eventually consume a staggering one-third or more of local budgets.
What does that mean? Far fewer services — even if local taxes are raised.
“It’s a threat to every city,” Carlsbad Mayor Matt Hall said. “All that money [spent on pensions] is money we can’t spend on quality-of-life issues. In some cities, it may even affect police and fire services.”
And many cities have already made deep cuts.
“This city is already 17 percent down from its peak in the number of employees,” said El Cajon City Manager Douglas Williford. “Employees have gotten no cost-of-living raises for seven years.”
Given this backdrop, we need a sense of urgency from the leaders of government agencies that contract with CalPERS. It’s time that they join San Diego and San Jose — big cities with their own pension systems — in making dramatic changes, starting with a move away from defined-benefit pensions for new hires.
It's especially interesting to see the first article point out what should be obvious: rising pension costs suck up money that could otherwise be spent on programs that are valued by liberal voters.