Bloomberg News

If Stockton Is Broke, Then Why Isn’t San Diego?: Steven Greenhut

March 01, 2012

Illustration by Mark Todd

Illustration by Mark Todd

Stockton, California, which is heading toward the first steps of Chapter 9 bankruptcy, is described as a crime-racked wretch designated by Forbes magazine as the most miserable city in America.

But it would be wrong to believe that the troubles in the city of almost 300,000 residents in the agricultural San Joaquin Valley are not necessarily a sign of things to come in more upscale municipalities across the state.

Unfortunately, the financial mess in Stockton echoes problems throughout California, even though public-sector union leaders and Democratic state legislators are in denial about this reality. In cities as affluent and diverse as San Jose and San Diego, municipal finances are hitting the wall, driven by unsustainable pension debt and health-care promises made to government workers during more flush economic times.

Stockton has not been a prime location since the Gold Rush, but only a few years ago it was a reasonable destination for commuters who couldn’t swing the prices in San Francisco, about 80 miles west. Now the murder rate is at record highs, and the police union is in a pitched battle with the new city manager. The debt-laden downtown redevelopment area looks like a ghost town, and the city is littered with foreclosed properties.

Stockton is also in the news as the test case for a new state law intended to put the brakes on municipal bankruptcy. It’s a reminder not just of how far and fast a city can fall, but also of problems that are festering everywhere.

‘Ponzi Scheme’

“There was no money set aside to fund those commitments,” Stockton City Manager Bob Deis told Capital Public Radio in reference to $760 million in city debt and unfunded liabilities. “While that was a legal decision they made over 20 years, it was an unsound decision and it has similarities to a Ponzi scheme.”

Blaming past councils, Deis pointed to a health-care plan that pays the entire cost of care for every city employee and spouse for life, after only one month on the job. “In my 32 years of managing finances for various local governments, I have never heard of a situation like this,” he added.

As Bloomberg News reported, the city “granted employees some of the state’s most generous benefits, and now has 94 retirees with pensions of at least $100,000 a year -- more than twice as many as some comparably sized California cities.”

Statewide there are more than 15,000 California government retirees who are members of the $100,000 pension club.

The Stockton police union, which had previously paid for ominous-looking billboards welcoming people to the second most dangerous city in California, is sure there’s some secret fund of money somewhere. Like most California unions, it refuses to recognize the state of affairs driven by the pension and health-care benefit upgrades they succeeded in attaining, mostly in the past decade. Instead of working toward reform, California’s unions and their political allies are trying to stop every possible relief valve short of huge tax increases.

For instance, the new state law requires a 90-day mediation period before bankruptcy can be declared, a watered- down version of a union-backed bill that would have required approval by a committee before cities could proceed with abrogating their debt loads. Previously cities, such as the similarly crime-plagued Vallejo on the northeastern edge of the San Francisco Bay Area, could declare bankruptcy on their own. Vallejo recently emerged from bankruptcy without seriously reworking its pension plans, however, which is a reminder to bankruptcy advocates that it can be helpful but won’t solve everything.

The state’s pro-union forces aren’t content slowing the bankruptcy process. They are committed to halting any serious reforms that would keep cities from reaching that last-ditch process.

Reforming Pensions

In beachfront San Diego, which has long been the poster child for pension abuses after a previous city council underfunded the pension system, reform-minded officials have placed a pension overhaul they call CPR -- Comprehensive Pension Reform -- on the ballot in June. The measures would put new employees in a 401(k)-style plan, require larger contributions from city employees, restrict pension spiking and would cap for five years the amount of compensation used to calculate pension benefits. This is a city where most of the payroll budget goes to retirees.

Not only are the unions gearing up for a campaign fight, but they allege that the very act of placing a pension-related voter initiative on the ballot is an “unfair labor practice.” They took their case to an unelected state panel, the Public Employment Relations Board, which filed an injunction to stop the election. Fortunately, a superior court judge nixed that idea, but it shows the lengths to which unions will go to stop reform, not to mention their undemocratic mindset.

In previous weeks, pension reformers in California dropped plans for an initiative to change the system after the labor-friendly California attorney general provided a deceptive title and summary to their measure, thus creating a difficult hurdle to overcome given that voters rely heavily on those descriptions.

In San Jose, Democratic Mayor Chuck Reed is part of a growing movement of progressives who realize that without pension reform every other city service is in peril. Relying on a city charter provision that sets only minimum benefit levels for city employees, Reed is pushing something that the state’s good-government Little Hoover Commission says is necessary -- cuts in benefits for current workers. Public employee unions recently filed a complaint with the San Jose elections commission alleging that Reed provided a “knowingly false, misleading and deceptive fiscal year 2015-2016 city pension contribution cost of $650 million.” Such harassment is reflective of a union movement uninterested in constructive reform.

Going Nowhere

Meanwhile, Democratic legislators at the Capitol are operating under the same mindset. Democratic Governor Jerry Brown’s serious but modest pension reforms gained the backing of the state’s Republicans, but are going nowhere in a Capitol dominated by Democrats. Assemblyman Roger Dickinson, a Sacramento Democrat, even introduced a Public Employees Bill of Rights, which received a firm rebuke from the Sacramento Bee’s liberal editorial page: “Survey after survey shows that local and state public employees enjoy some of the best benefits -- and strongest job protections -- of any public workers in the nation. Given that, why does California need a Public Employees Bill of Rights?”

The answer is that the state’s legislators are so beholden to public sector unions that they are oblivious to the financial meltdown all around them and aren’t about to do anything before more cities’ finances hit the wall.

The unfunded liabilities are so large that it’s unlikely that an economic rebound will correct a problem long in the making. Even when the economy was doing well, legislators continued to increase benefits beyond the ability of taxpayers to pay for them.

Writing in the Bee this week, Stanford professor Joe Nation, a former Democratic assemblyman, argued that “from Stockton to San Diego, government pension costs are crushing local governments.” The article explained: “Based on economic and finance standards used everywhere except in the public pension world, the top 24 independent pension systems are collectively $136 billion in debt and have only 54 cents for every dollar they owe. In nearly every municipality, employee pensions are being prioritized over libraries, parks, street maintenance, health care and public safety.”

Poor cities, such as Vallejo and Stockton, are going to face fiscal disaster first, but the problem is spreading across California, and there’s nothing much the unions can do once cities start running out of money.

(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: Steven Greenhut in Sacramento at steven.greenhut@franklincenterhq.org.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.


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