TOPICS > Economy

We Built This City on Debt ‘n’ Entitlements: Stockton Faces Bankruptcy Threat

March 16, 2012 at 12:00 AM EST
As cities across the nation increasingly become mired in financial crises due to pensions, health care costs, debt and overspending, correspondent Spencer Michels profiles one city making efforts to avoid bankruptcy: Stockton, Calif.
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TRANSCRIPT

JEFFREY BROWN: And we turn to a major city in California once riding high in the boom years, now on the verge of bankruptcy, and joining other cities around the country forced to make serious cuts to stay afloat.

NewsHour correspondent Spencer Michels reports.

SPENCER MICHELS: The police department in Stockton, Calif., is getting a new chief, the fifth one in the last eight years. They retired, often early, with generous pensions, one reason, but certainly not the only one, that the city is in dire financial shape.

Stockton, 100 miles east of San Francisco in the agricultural Central Valley, is teetering on the brink of bankruptcy. If that happens, this city of 300,000 would be the nation’s largest bankrupt city. Increasingly, cities across the nation are in crisis because of pensions, health care costs, and overspending, all aggravated by the recession.

To prevent bankruptcy, Stockton officials have been slashing the budget. The police have taken the biggest hits. Through cuts and retirements, the force is down 27 percent since 2008. And that has had a big impact, according to public information officer Pete Smith.

PETE SMITH, Stockton Police Department: Let’s say you come home from work, your house has been burglarized, and you find the front door open, but the house is safe. It’s been ransacked. There’s a good chance that you won’t get a uniformed officer at that call. We primarily will respond still to in-progress and violent crimes.

SPENCER MICHELS: While police presence is down, violent crimes and gang activity are increasing in Stockton, which has the state’s highest crime rate for large cities, and the second highest murder rate.

The fire department has suffered cuts as well, and other city employees have had to take furloughs and benefit reductions. Some residents, like professional photographer Arnold Chin, see the quality of life deteriorating before their eyes.

ARNOLD CHIN, professional hotographer: You’re seeing graffiti, etching, garbage, transients hanging out on the corner soliciting money, panhandling.

SPENCER MICHELS: A year ago, Stockton was named the country’s most miserable city by Forbes magazine. Now citizens are asking, how did Stockton get itself into such a mess and how will it get itself out?

As in many cities, home construction, which had been booming, collapsed as thousands of homes were foreclosed on, and thousands of construction jobs were lost. Prices of homes dropped 65 percent. And according to the mayor, the situation just kept getting worse.

ANN JOHNSTON, mayor of Stockton, Calif.: Layer on top of that the great recession we’re dealing with, our unemployment rate, which is probably 17 percent right now. Those all combined to form the perfect storm for our city.

SPENCER MICHELS: But there were some mistakes that Stockton officials also made in the past.

When times were flush, Stockton went on a building spree. This ballpark seats 5,000 people and is home to the Stockton Ports. But times have changed. Stockton owes money for projects like this, and may not be able to pay it back.

City officials sold bonds to finance redevelopment projects like a new hotel and an upscale events center built near the water that is channeled up to Stockton from San Francisco Bay. The projects have not generated a lot of business. And the city constructed a new marina, which is only partially successful.

Stockton Record columnist Michael Fitzgerald watched it all happen.

MICHAEL FITZGERALD, columnist, Stockton Record: In the first decade of the 2000s, city government racked up $319 million on construction costs, and that debt is still hovering over the city.

SPENCER MICHELS: Dwane Milnes was city manager during much of that time, and today heads the retired city employee organization.

DWANE MILNES, former Stockton city manager: The city was very anxious about economic development, with the objective of bringing people into the core of downtown.

SPENCER MICHELS: Didn’t quite work, though, did it?

DWANE MILNES: It hasn’t worked yet. What people expected was instant miracles. You don’t build a ballpark and an ice arena and a downtown theater all within a short period of time. You stretch those out.

SPENCER MICHELS: But Fitzgerald says there was more the City Council did wrong back then. Remember all those police chiefs and retired cops and other city workers drawing pensions? Fitzgerald says they also have premium health care benefits, which have saddled the city budget.

MICHAEL FITZGERALD: It is an outrage. In the 1990s, the city manager and the council gave the store away to the public employee unions. They created a half-billion dollar retiree medical plan, and they never put a dollar down on it.

SPENCER MICHELS: Former city manager Milnes denies rolling over to the unions, and says the city was convinced it could afford what it was spending for benefits.

DWANE MILNES: It could be afforded based on long-term forecasts, and we were doing long-term forecasts of revenue and expenses that were based on conservative — conservative growth.

SPENCER MICHELS: Still, newly hired city manager Bob Deis says he was dealt a rough hand, especially paying for health care for 1,100 workers who retired before the age of 65.

BOB DEIS, Stockton city manager: Next year, ironically, we’re gong to spend $10 million — $9 million on retiree health insurance, but we’re only spending $8 million next year on our employees. So that’s an issue we have to deal with.

SPENCER MICHELS: The solution, many say, is to cut those pensions and health benefits. That brought angry retirees and union members to a recent meeting of the Stockton City Council, where the possible bankruptcy was on the agenda.

BEVERLY FOSTER, California: These people have come out here to let you know that they are going to vote and they’re going to put you out of office. They’re going to clean City Hall out.

RALPH LEE WHITE, California: Do not mess with our city employees’ pensions and different stuff like that. We have got millions in these banks around here. We are nowhere close to bankrupt.

GERI RIDGE, California: And they need to stop blaming current and retired city employees for the mess that they’re in. We didn’t make this mess.

SPENCER MICHELS: City Manger Deis, one target of the audience, says it really is a mess and the city is close to bankruptcy. It has defaulted on some bonds already.

BOB DEIS: We can’t cut services anymore. We feel the employees have borne the brunt of our situation, and we can’t cut compensation much more. So, what’s left? What’s left are other creditors. And so we would like to talk to them and see if they can help with us.

SPENCER MICHELS: While the fight goes on, the people of Stockton continue to struggle. More and more people are showing up for food giveaway programs and free meals, like these at St. Mary’s Interfaith, where Edward Figueroa is the CEO.

EDWARD FIGUEROA, CEO, St. Mary’s Interfaith: It used to be a busy time for us was 400 meals. By the end of the month, we often are seeing upwards of 800 individuals turning to us for their noontime meal, which is probably their only hot meal that they’re going to receive that day.

SPENCER MICHELS: And, Figueroa says, bankruptcy hurts the employment picture.

EDWARD FIGUEROA: It gives one more thing for businesses that are considering moving, bringing their business to this community, one more reason for them to look someplace else.

SPENCER MICHELS: Leaders in Stockton are looking for lessons from the debacle.

ANN JOHNSTON: The city of Stockton didn’t have any real reserves. We were betting on the economy to continue to just flourish, and, of course, the bottom dropped out.

DWANE MILNES: As governments, we really ought to be moving much more conservatively than the political environment often demands.

MICHAEL FITZGERALD: They’re going to have to take a haircut.

SPENCER MICHELS: A haircut, meaning less money?

MICHAEL FITZGERALD: Meaning less money.

SPENCER MICHELS: And is that going to fly?

MICHAEL FITZGERALD: There’s no choice.

SPENCER MICHELS: Under a new state law, Stockton will attempt to enter mediation with its creditors to avoid bankruptcy.

Meanwhile, the city is bitterly divided on who’s at fault and how to solve seemingly unsolvable problems.