As in the Vallejo bankruptcy, public employee pensions may not be targeted for cuts if Stockton files for bankruptcy on June 26, a step authorized by the city council this week if mediation fails.
But again like Vallejo, Stockton may use bankruptcy to cut generous lifetime health care promised retired city employees, which the council was told will soon cost more than health care for current workers.
Before a city can file for bankruptcy, a new state law requires up to a 90-day attempt supervised by a mediator to reach an agreement with creditors, unless there is an emergency that threatens public health and safety.
The Stockton city council voted 6-to-1 Tuesday night to authorize the city manager, Bob Deis, to immediately file for bankruptcy if there is no agreement when the 90-day period expires June 25.
The main reason given for the urgency is that the city, facing a $26 million deficit projected to grow to $40 million in three years, needs either big cost cuts through mediation or bankruptcy protection from creditors to enact a balanced budget by July 1.
The council was told that a strong legal filing for bankruptcy could not be prepared in a few days, the period between June 25 and July 1. In addition, said Deis, a vote to prepare a bankruptcy filing might “send a message” to the negotiators.
“How that plays out psychologically would be anybody’s guess,” he told the council.
Deis also plans to have a budget and a “pendency” plan for operating under bankruptcy protection ready by June 26. In some media reports and public comments at the council meeting, mediation is regarded as nearly certain to fail.
Unions apparently share that view. After Vallejo declared bankruptcy unions, fearing labor contracts would be overturned, backed legislation requiring cities to get approval from a labor-friendly commission in Sacramento to file for bankruptcy.
A compromise with cities produced the mediation bill, AB 506. Now the Stockton situation has prompted unions led by firefighters to move a bill, AB 1692, that cities say busts the earlier deal and would allow unions to prolong mediation for months or years.
In some stories in the national media, Vallejo is being cited as an example of how bankruptcy can help cities deal with built-in deficits resulting from revenue losses during a lengthy recession, difficult-to-cut labor costs and other problems.
A Washington Post story on May 23 calling Vallejo “a model for cities in an age of austerity” said bankruptcy has been a “last resort” because cities fear a blow to their ability to borrow and reputation.
“But that attitude has started to change as more cities have found themselves facing fiscal catastrophe; bankruptcy offers an opportunity to start over with a clean slate,” said the Post story.
A bankruptcy attorney retained by Stockton, Marc Levinson, who also represented Vallejo, told the council there are differences between the two port cities, Stockton with 292,000 residents and Vallejo with 118,000.
Levinson said the Stockton situation is more complex: nine unions, instead of four, and a number of bond holders, not one consolidated bond holder. He said one of the main problems in Vallejo was that unions thought city financial data was inaccurate.
Vallejo filed for bankruptcy in May 2008 and emerged last November. Levinson said city legal fees to his firm and others, some for routine bond work, totaled $12 million to $13 million.
Deis told the council bankruptcy costs would be more than covered by savings. His 88-page memo to the council describing Stockton’s financial situation said Vallejo cut its long-term obligations by more than $100 million.
Much of Stockton’s financial problem is said to be the result of decades of mismanagement. State Controller John Chiang has five teams of auditors going over city books for the decade ending in 2010. The city has 10 independent auditors at work.
Deis is leading a team of experts hired by the city as it struggles to regain solvency. During public comment a Stockton resident, who said he has been urging the council to file for bankruptcy for four years, turned to the team sitting in the front row.
“You guys look great in your suits,” said Gary Malloy. “I just hope you’re worth the money.”
Stockton had a housing boom, averaging 3,000 housing starts a year from 2003 through 2005, followed by a bust, averaging 150 starts from 2009 to 2011. The median home price, $407,000 in 2005, dropped to $118,500 last February.
One of every 60 homes is in some stage of foreclosure, the worst rate in the nation. A nationwide study last year said 56 percent of Stockton home loans were “underwater,” second to Las Vegas with 66 percent.
Stockton issued $190 million in bonds for public facilities last decade, including $40 billion for a new city hall and $32 million for three parking garages. After the city stopped bond payments, Wells Fargo took control of the city hall building and garages.
After deep cuts in police and fire services, one of the grim statistics is a soaring crime rate. The council was told the city has had 26 homicides this year, compared to nine at this time last year.
The $26 million deficit is in a $181 million general fund budget for the new fiscal year beginning July 1. A chart shows that retirement costs are 17.5 percent of the general fund.
Several unions negotiated contracts that cut pay and retirement benefits for new hires. But the city declared two fiscal emergencies to impose cuts on the police and another large union.
The two unions are challenging the cuts in the courts and at a state labor board. If the unions win, the $26 million state deficit is expected to grow by $16 million and possibly an additional $12.5 billion if back pay is ordered.
Last December the New York Times reported that Vallejo originally planned to cut the pensions of current workers and retirees, but decided not to when the California Public Employees Retirement System threatened a costly lawsuit.
A resident told the Stockton council Tuesday that if the city files for bankruptcy, there will be no attempt to cut pensions because CalPERS has a “big wallet” and would take the issue to the U.S. Supreme Court if necessary.
Deis said after the meeting he thinks the council is unlikely to push for a pension cut in bankruptcy because Stockton would be at a “competitive disadvantage” with other government employers offering similar benefits through CalPERS.
But, he said, the retiree health care benefits offered by Stockton are “well above the labor market.” His memo said annual retiree health care costs are $13.8 million ($9.2 million general fund) and are expected to double in ten years to $27.4 million.
Like the state and most cities, Stockton has set aside no money to invest and help pay for retiree health care. The debt or “unfunded liability” for retiree health care promised Stockton workers is an estimated $417 million in the decades ahead.
Less than 1,100 of the current 2,400 city retirees receive health care benefits, and their pensions are on average twice as high as retirees who do not receive health care benefits.
The city pays the full health care premium for the retiree and one dependent, with no cap on the cost. Because no minimum time of service was required for eligibility, an employee theoretically could work one month and be eligible for retiree health care.
“Starting in FY 2013-14, the city will be spending more on health benefits for retirees than for current employees,” said the memo.
Ed's Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/