The debate over Stockton’s solvency
The hearings for Stockton, California’s bankruptcy have not even begun and one of the city’s bond insurers, Assured Guaranty, is already pushing back on Stockton’s claim of insolvency:
Stockton’s city council “failed to make the politically tough decisions to adopt serious budget reforms and consider alternative plans to resolve its long-term structural deficit,” Assured added…
…Based on its own review of the city’s finances, Assured said Stockton could have considered alternatives to bankruptcy, like selling excess city property, raising taxes or fees, cutting non-essential services, restructuring debt, seeking more concessions from workers and pension reform, among other options.
After studying the city’s financial reports, it looks as if Assured is probably right that the city has not taken adequate steps to ensure solvency. If the city is not insolvent, then a federal bankruptcy judge should dismiss Stockton’s Chapter 9 bankruptcy filing. That said, if lawsuits against Stockton become overwhelming, the city can seek the protection of the courts and stay all legal proceedings. Since Wells Fargo has repossessed three of Stockton’s parking garages and its city hall building, that might compel a bankruptcy judge to allow the bankruptcy filing to proceed.
There are three places one can look to understand Assured’s claims that Stockton has not done enough to right its fiscal house:
1) Property tax collections. Although property assessments dipped slightly from 2009 to 2010, property tax collections fell off a cliff, dropping from $31.1 million in 2009 to $22.1 million in 2010 (Stockton’s most recent financial filing, page 8). In Assured’s eyes, rather than skipping bond payments, the city should raise property taxes.
2) Pension plans for the city’s safety and general workers. Assured is on the hook for $125 million in pension obligation bonds that it guaranteed in 2007. According to Stockton’s bankruptcy filing (page 10), the pension plan for safety workers was funded at 87.4 percent in 2010, down from 95.6 percent in 2007. Similarly, the pension plan for general workers was funded at 90.4 percent in 2010. These are well above the national level of funding for pension plans, which is approximately 70 percent. As I wrote last week, the bankruptcy judge in the Vallejo, California Chapter 9 bankruptcy case ruled that employee contracts could be adjusted. Pension payments seemingly could be on the table in a Chapter 9 proceeding.
3) The city’s assets. Stockton has not sold any assets to raise much-needed revenue. It did have several buildings repossessed when it skipped bond payments, but to my knowledge it has not embarked on any asset sales.
Is Stockton broke? Yes, likely it is. The bigger question now is whether the city has done enough to dig out of a hole? It is ending retiree healthcare, which will be a burden on many retired city workers, and is planning to skip bond payments. But Assured may be right about the city needing to take more drastic steps to achieve solvency.