Stockton, California goes bankrupt
Last-ditch mediation with its creditors has failed, so Stockton, California will almost inevitably become the largest American city to declare bankruptcy. Its population of 290,000 will allow it to dethrone previous record-holder Bridgeport, Connecticut, which has held the bankruptcy crown since 1991.
A brand-new California law provided for three months of mediation with the city’s creditors, and while this general effort has failed, the city manager hopes to reach arrangements with one-third of them, according to the Associated Press. The city is looking at a $26 million shortfall on a $521 million budget, and it’s sitting on $700 million in bond debt.
The L.A. Times notes that a recently published report on the mediation efforts was entitled “Death by a Thousand Meetings.” That sounds like a suitable epitaph for the freewheeling era of madcap federal, state, and municipal spending that is coming to an agonizingly painful end in the United States. Those crazy Big Government deficits are financed by the sale of bonds.
Stockton has already stopped making its bond payments, and outright defaulted on $2 million of its debt, prompting Wells Fargo to seize the building that was supposed to become the new city hall. Anyone who thinks deficits are just red numbers on some abstract spreadsheet, which can soak up an infinite amount of red ink, will receive a rude awakening when those bonds can’t be sold at a reasonable rate of interest anymore, because investors perceive them as too risky. Keep an eye on Spain if you’d like a little sneak preview of what awaits every level of American government.
How did Stockton get into such financial trouble? Oh, the usual. The L.A. Times says it “can be seen everywhere in the city’s core… There is a sparkling marina, high-rise hotel and promenade financed by credit in the mid-2000s, mere blocks from where mothers won’t let their children play in the yard because of violence. During the economic boom, this working-class city with pockets of entrenched poverty tried to reinvent itself as a draw to Bay Area refugees and a popular site for conventions. It offered generous city employee pension plans and benefits.”
Stockton rode high upon the government-created housing bubble, and fell hard when it popped. Oceans of housing were built to lure middle-class Californians away from the Bay Area – a triumph of liberal government where only the hyper-rich can afford to live these days. After the housing market collapsed, Stockton ended up with one of the highest rates of home foreclosure in the country, along with the second-highest rate of violent crime in California. There is some suspicion that corruption played a role in making city money disappear, and a state investigation is under way.
Over the past three years, Stockton has been obliged to reduce the size of its police and fire departments by over 25 percent, and reduce the compensation of city employees. Reuters reports that the city’s new 2013 budget includes a proposal to eliminate medical benefits for retirees to close its budget gap.
The much smaller city of Vallejo, California recently emerged from bankruptcy, after going belly-up in 2008, giving Stockton residents some hope that their government can pull out of its fiscal death spiral. The law enforcing 90 days of mediation was passed after the Vallejo bankruptcy, and was meant to prevent other cities from following suit. So much for that idea. How can anyone expect insolvency on the scale produced by nutty Big Government spending binges and vampire public unions to be “mediated” away?
“We have hit the wall; we are insolvent,” the New York Times quotes mayor Ann Johnston as saying in early June, when the city manager was authorized to file for Chapter 9 bankruptcy after mediation efforts failed. “This is the action that we must take to keep the services that are important for the safety and health of our citizens.”
Many other governments can see that “wall” approaching, and it has even become dimly visible to some of the less obtuse members of the U.S. Congress. Stockton offers an important lesson in the dangers of allowing government to vacuum up the profits from “boom” economies and go on shopping sprees, instead of being held to a very low, tightly fixed percentage of private-sector income and ordered to conduct its minimal duties carefully and frugally.
This particular “boom” was created by leftist ideologues, making Stockton one more pile of wreckage we can credit to Barney Frank, Chris Dodd, Barack Obama, and the other architects and protectors of the subprime mortgage crisis. This is what happens when raw political power is used to pump garbage data into a marketplace. Everyone from individual consumers and investors, to local and federal government agencies, makes big plans to spend “wealth” that never really existed. In reality, what they end up building is the “wall” Mayor Johnston spoke of.