Why Stockton is broke

July 6, 2012

Stockton Vice-Mayor Kathy Miller talks about the exorbitant salaries paid to city workers and why the city is filing bankruptcy.

The media has described the problems of Stockton, California as being caused by the housing crisis and economic recession. A non-profit, California Common Sense, points to another reason for the city’s bankruptcy: its extraordinarily generous employee compensation agreements (emphasis mine):

[Stockton] employee salaries are scheduled to automatically increase 2.5-7%, depending on General Fund revenue growth. Consequently, employee salaries increase 2.5% even if the General Fund shrinks compared to the previous year.

Other unions such as the police, requires a periodic market survey to ensure the city does not pay less than comparable cities. A provision in the MOU further states that if any other union group in Stockton receives a higher wage increase than outlined in the formula, then all employees affected by the General Fund budget must receive the same increase as well.

In an economic slowdown, when sales and property tax collections are cratering, this is a recipe for unbalanced budgets. The number of employees must be cut to maintain overall expenses and reduced when revenues shrink. California Common Sense then moved on to the even bigger issue of healthcare costs for employees:

Although salaries make up the bulk of employee services expenditures, expenditures on benefits, especially health costs, are rapidly rising.

Medical costs have grown at an average rate of 9.7% over the past decade and unless the city makes a concerted effort to address this, health costs for current employees alone could consume more than 20% of the budget by 2015.

CCS says salaries and benefits must be addressed to get Stockton on solid footing. The report details the changes that Vallejo, California made in its bankruptcy and that Stockton could anticipate in its Chapter 9 case:

The outcomes impacting the city included:

• Number of police officers reduced from a high of 155 to 90 in 2011-12.
• Fire Department staff reduced to 32 from a high of 73.
• Number of fire companies reduced to 5 in 2010-11, down from 9 in 2007-08.
• Infrastructure maintenance reduced, leaving many streets and buildings in disrepair.

The outcomes impacting stakeholders included:

• Creditors are receiving their principal payments, but only a portion of their interest payments.
• Unions accepted lower wages and benefit packages for their employees.
• There is no longer a minimum employee requirement in the fire department.
• Insurers of Vallejo’s debt are repaying holders of Certificates of Participation.
• Bondholders are relatively protected from losses.

There are many ailing municipalities in California and across the nation. Some will seek bankruptcy to shrink their liabilities. But bankruptcy is a blunt tool, and given the findings in this California Common Sense report, states might want to consider legislation that gives municipalities more room to make changes in union contracts.

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