This is why Stockton is broke
Stockton, California is in federal bankruptcy court trying to make the case that it is insolvent and should be taken into the protection of the court to sort out its debts and obligations. Meanwhile, bond holders and bond insurers say it hasn’t tried hard enough to meet the requirements of Chapter 9 bankruptcy. They say the city overpays its employees and has not negotiated with CalPERS, the statewide pension system for public employees. Over 75 percent of Stockton’s general fund expenses go to pay police and fire salaries and pensions, much higher than in most communities.
On the question of overpaying its employees, Stockton’s city manager, Bob Deis, wrote in an OpEd for the Wall Street Journal last year:
Also painful is our public safety situation. We are the 10th-most violent city in America. Rates of violence are increasing by double digits, with our murder rate on track to surpass last year’s record of 58 murders. We have the second-lowest police staffing levels in the country for a large city, and often Stockton Police can respond only to “in-progress” crimes. Oakland, a nearby city with similar crime challenges, has 44 percent more police officers per capita. With high poverty rates and gang activity, we cannot turn our back on public safety due to creditor pressure.
The problem with Deis’ rationale is that the city is paying police officers and firemen astronomical salaries, as I documented last July with data from the California Controller’s Office. Stockton Vice Mayor Kathy Miller discusses the pressures of extremely high employee costs:
Stockton is paying its safety officers much higher wages than other communities pay. When the average cost for policeman is $150,000 per year, a community is very limited in how many boots on the ground it can have. Now the money is not there.
The other problem with high salaries is that it translates into high pension costs. Stockton has not challenged the pension liabilities that it owes to CalPERS in bankruptcy, but instead it claims it needs these high pensions to attract “qualified” safety officials. City manager Deis in the Wall Street Journal again (emphasis mine):
Nor can we leave the CalPERS state pension system. CalPERS should be reformed, but if Stockton didn’t offer an industry-standard pension plan, we simply would not be able to staff an already challenged police department.
It is unrealistic for creditors to posit that Stockton reject existing pension obligations. The city is fiercely competing for qualified individuals, particularly police officers and senior management, and since reducing our compensation we have already lost 45 officers to other cities. We cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.
99 percent of police applicants don’t qualify or wash out? Is the Stockton police force run by Navy Seals? It just doesn’t seem logical that Stockton needs to offer high salaries and rich pension benefits to attract a police force.
City Manager Deis admitted in the bankruptcy hearing that even after the cuts the city proposed for bondholders and other creditors, it would have a $100 million deficit after 10 years.
Stockton, CA, would accumulate a $100 million budget deficit after 10 years even if it got all attempted cuts prior to bkr filing – BBG
— TempFlashback(@TempFlashback) March 26, 2013
This does not take into account the news reported by Dan Walters of the Sacramento Bee that CalPERS is likely to increase payments from local governments:
The trial began just a few days after CalPERS’ board tentatively decided to incrementally increase mandatory payments from state and local governments by 50 percent to offset the heavy losses it suffered from losing investments in stocks and real estate.
Forcing bondholders to take haircuts is not enough to put Stockton on a sustainable fiscal path that ensures public safety. Unless Stockton uses the bankruptcy process to address its personnel costs, the effort will have been in vain.