Cities in financial straits weigh bankruptcy

February 8, 2014 at 3:25 PM EDT
A wave of bankruptcies is moving across the country as cities try to manage crushing debt from pension obligations. NewsHour Weekend reports from Vallejo, Calif., with a cautionary tale for cities that are looking to bankruptcy as the solution.

RICK KARR: Bob Lee’s been through some major changes over the past few years. He moved out to the country after a couple of decades in the city. And he went into a new line of work.

He became the pastor of a church with a small congregation in a rural part of Napa County, Calif., about 50 miles north of San Francisco. He’d only been a believer for a few years when he decided to go into the ministry, but he was certain that it was his calling, and a chance to serve his community.

BOB LEE: I’ve had a good life, and if I can help someone else have a better life, that’s what life’s about. When we leave here, we don’t take anything with us. I don’t take my retirement benefits, my medical, none of those things.

RICK KARR: Lee could have a new career because he retired from his old one with benefits. For nearly 30 years, he was a police officer in the city of Vallejo, in the Bay Area, about midway between his church and San Francisco. He was able to retire at 50 with a pension and family health insurance benefits worth a total of a little over $180,000 a year.

BOB LEE: I knew that I wasn’t going to have to count on a church salary to carry me through my retirement. I was going to depend on my law enforcement retirement to do that.

RICK KARR (to LEE): It sounds like you had a pretty good sense that when you retired, Vallejo was going to continue to take care of you, in a way?

BOB LEE: Well, I knew they were going to take care of me. That’s what they said they would do.

RICK KARR: But taking care of Bob Lee and other retirees is taking a toll on the city of Vallejo’s finances. Retirement benefits will cost the city $21 million in the current fiscal year — nearly $4 million more than the year before. Two years ago, they accounted for 19 percent of the budget. This year, their share is nearly 26 percent. Five years from now, the city projects it’ll be almost 30 percent. That’s bad news for a city with a $5 million budget deficit. Stephanie Gomes feels like she’s watching history repeat.


STEPHANIE GOMES: We could go bankrupt again. And the first one is hard enough. I can’t even begin to imagine the second one.

RICK KARR: Gomes had a front row seat on the city council as Vallejo went broke in 2008. The city never recovered from the blow its economy took in 1996, when the Mare Island Naval Shipyard closed there and thousands of residents lost jobs. The additional burden of the recession was too much for the municipal budget. For Gomes, the worst part of the crisis was just before the city filed for bankruptcy.

STEPHANIE GOMES: Because before is when you’re scrambling, trying to figure out how not to go into bankruptcy. So we had to cut roads, you know,  fixing our roads, trimming our trees, hours at the library, you know, anything and everything.

RICK KARR: There was one thing the city couldn’t cut: pensions. Under California law, Vallejo was prohibited from cutting them. Pensions cost the city so much because it pays its workers so much — the fifth-highest wages for municipal employees in the state. And the highest wages in the city are paid to police.

STEPHANIE GOMES: You know, in Vallejo, we pay, you know, $150,000, $175,000, $200,000, $250,000, $300,000. So you have people retiring at 50 with 90 percent of that.


RICK KARR: Bob Lee argues that Vallejo cops earn it, given the fights, bruises and broken bones. He lost two friends in the line of duty. When he was growing up just outside of town, a few areas of the city had problems with crime. But when crack cocaine came to town, the city’s crime problem got a lot worse.

BOB LEE: People who lived in the city were crying out for something to be done about the crime. So, the city started paying more for police officers. They started providing better benefits to attract good officers and we built a very good police department. One that was looked up to by many agencies in the state.

RICK KARR: Last year, when the city had to cut spending again to deal with its $5 million deficit, the council turned to the police budget. Last December, the council chambers filled up with residents, police in uniform, and retired cops as the council took up a proposal to cut health care benefits for retired police by $2 million a year. Stephanie Gomes and the rest of the council listened as Bob Lee told them that the proposal was unfair.

BOB LEE: For those of you sitting out here, you picture yourself retiring 15, 20 years from now with what you thought you were going to get and having it taken away.

RICK KARR: Gomes can empathize with Vallejo police — their department was the last one her husband worked in before he retired. But she wanted the cut to be her last major accomplishment on the council before a term limit forced her to step down a few weeks later. The council voted six-to-nothing to make the cuts. Bob Lee lost the free insurance that had covered him, his wife and their daughter. Now, Lee and his wife pay a total of $769 a month for themselves.

BOB LEE: I am disappointed and frustrated that the city’s done this.  To me and for other retirees, they’ve let us down. And in some ways, it seems like they’ve taken an easy route to fill a monetary gap by cutting retiree benefits. I was promised something when I retired. I worked almost 30 years to receive that, and I based my life upon it.

RICK KARR: Was there anything else the city of Vallejo could’ve done at that point? Where could they have cut?

BOB LEE: Where I think that they should’ve started to make changes is with the current employees. Those people still have an opportunity to plan for these things in the future.

STEPHANIE GOMES: I get they put their lives on the line. My husband was a police captain. Retired after 36 years. I get it. But you choose that job because you believe in it. And you choose it because of the service and you believe in serving the public. And the public’s hurting.


RICK KARR:  How far is it fair to go in cutting that though?

STEPHANIE GOMES: I would cut the least amount that we could because I agree. You know, people retire and they kind of make plans on that. But what about the promises to the taxpayers? The people paying these pensions? It’s promises to a many and promises to a few, and if we all took a little bit of cut and if we all shared in that pain, then it wouldn’t have to be so great.

RICK KARR: The confrontation in Vallejo is part of a broader conflict over the cost of taking care of retirees that’s divided other California cities. And it may be coming to a lot more.

JOE NATION: It is a systemic problem. It’s like a virus that is making its way through California municipal governments. And everyone will get hit with it eventually.

RICK KARR: Joe Nation is a professor of public policy at Stanford. He sees California’s municipal budget crisis as a preview of worse things to come in other states.

JOE NATION: If you look at the financial status of California, of the pension systems here, versus the rest of the country, we’re not in the worst shape. We’re probably about the middle of the pack.

RICK KARR: He believes that as long as the cost of pensions keeps rising, cities all over the country will have to either raise taxes or cut other parts of the budget.

JOE NATION: And that’s sort of the path that people are on right now.  I mean, the numbers are just staggering.

RICK KARR: In California, the cost of pensions is rising faster than that of police and fire departments, sanitation, education or anything else in municipal budgets. Stephanie Gomes sees no way for cities to rein in that cost because they’d have to cut pensions to do it, and since that’s prohibited under California law, they’re likely to go bankrupt. She’s been campaigning to change that law to give cities the right to negotiate for pension cuts. She and other supporters hope to get the initiative onto the ballot in a statewide election so that California voters can decide.

She’s also running the volunteer anti-graffiti campaign she and her husband started to make up for the program the city cut. She sees a lot of other residents getting together to do things the city used to do, which could be a good sign for Vallejo’s future. And on that point, Bob Lee agrees with her. There’s a story like that in the Bible.

BOB LEE:  In the Book of Acts, after Christ went back to heaven, he left the people with a mandate. He said, “Love God and love your neighbors.” And that’s what the people did. They set their differences aside. They came together to make a better future for everyone. And I think that you can do that, but it takes a lot of hard work for people to be willing to set aside things that they oftentimes hold very dearly.

This segment was produced for the NewsHour Weekend as part of WNET’s “Pension Peril” project funded by the Laura and John Arnold Foundation. After its production, because of a perception issue, PBS & WNET agreed to suspend the project and return the Arnold Foundation gift. WNET, the producer of the NewsHour Weekend, did not provide details about the funding of the project to reporters and producers of the segments.

The failure to mention the Arnold Foundation’s connection to a statewide initiative mentioned near the end of this segment about Vallejo, CA, was a simple omission, not an effort by the production team to conceal a relationship that they did not know about.