SACRAMENTO ‚?? Few non-local people pay much attention to the goings-on¬†in Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000¬†that sits in the ¬†agriculturally rich San Joaquin Valley at the eastern¬†edge of the California Delta. But bond-holders, taxpayers and¬†government officials throughout the country will be listening to U.S.¬†Bankruptcy Judge Christopher Klein‚??s expected ruling on Monday as he¬†decides whether the city may remain in bankruptcy and pursue a plan¬†that stiffs its bond-holders.
If Klein sides with the city, then municipalities will face a¬†disturbingly low bar for pursuing bankruptcy. They will be emboldened¬†to choose Stockton‚??s course ‚?? i.e., using bankruptcy as a strategic¬†policy tool to offload debts without having to confront the main¬†reasons that they went bankrupt in the first place, such as lush¬†pensions. Bankruptcy will no longer be a policy of last resort. This¬†should have an impact on bond markets.
If the city wins the case, argued March 25-27 in the Sacramento¬†federal courthouse, then the public-sector unions and the¬†scandal-plagued California Public Employees Retirement System are¬†right. No matter what problems befall a city, public services and¬†taxpayers suffer first while union members and public retirement¬†systems are protected.
Granted, no one should feel too sorry for the lenders (and their¬†insurers) who provided the pension-obligation bonds to the city. They¬†knew the risks when one lends money to a city ‚?? especially one¬†controlled by the unions. But their argument is strongest. A city¬†shouldn‚??t use bankruptcy as a means to get rid of uncomfortable debts.¬†It should use this tool only when it has slashed its costs but still¬†can‚??t get out from under the load.
On Tuesday, a Stockton management consultant called at the trial¬†stated that the city would have a $100 million budget deficit in a¬†decade if it does not take the bankruptcy route, in an attempt to show¬†that it had no choice but to declare Chapter 9. But how hard has the¬†city tried to deal with its debts?
As the attorney for the bond insurer noted in his closing comments on¬†Wednesday, the city intended, from the outset of this process, to¬†shortchange the bond holders. It has refused to address its biggest¬†debt ‚?? the payments that it owes to CalPERS to pay for its pension obligations. It only modestly pulled back compensation from rates far¬†above the market to somewhere near the average for public-sector¬†workers in California.
Essentially, the city plan has put pension debt off the table, arguing¬†that pension payments and benefits cannot legally be touched. A¬†bankruptcy would be the place to challenge that assumption, but¬†Stockton officials have no interest in doing so, figuring it‚??s easier¬†to go after Wall Street than the unions. If Stockton gets its way,¬†then cities can spend anything on pensions and there is no way to ever¬†get out from under that debt.
Some of the most telling testimony came Tuesday morning, when¬†bond-insurer Assured Guaranty‚??s attorney Guy Neal questioned city¬†councilmember Kathy Miller about a July 2012 video that explained the¬†fiscal situation to city residents. Here are some of her statements¬†from the video:
‚??In the 1990s, Stockton granted its employees some of the most¬†generous and unsustainable labor contracts in the State of California‚?¶ Safety employees could now retire at the age of 50 ‚?¶. . Many safety¬†retirees today earn 90 to 100 percent of what they made when they were¬†still on the job.‚?Ě
That’s common. But Miller noted that ‚??Stockton went even further than¬†most other cities and granted things like unlimited vacation and sick¬†time that could be cashed out when an employee retired, and added pay¬†categories for almost everything imaginable‚?¶ Our public safety¬†employees were costing us on average more than $150,000 a year each.¬†That‚??s three times more than most of us in Stockton make in a year.‚?Ě
She described the ‚??Lamborghini‚?Ě health plan the city‚??s employees¬†received: ‚??This was free medical care for a retiree and a dependent¬†for the rest of their lives. No co-pays, no generic requirements, no¬†HMOs, and no premiums. See any doctor, stay in any hospital, purchase¬†any drug, and just send the bill to the city of Stockton.‚?Ě
Absurd pay and benefits are common, and not just in Stockton. San¬†Francisco Chronicle columnists Matier and Ross revealed recently that¬†the Alameda County executive receives a $423,000 a year pay package¬†for life. Compensation for California firefighters is in the $175,000¬†a year range. Some Newport Beach lifeguards receive $200,000 a year¬†pay packages. ¬†As a friend of mine joked, revolutions have been fought¬†over lesser instances of public pilfering.
Stockton pulled back on some abuses, but has left the main problem in¬†place. Why is it OK that Stockton residents have to put up with closed¬†parks, reduced policing and other cutbacks to protect outrageous¬†pension and pay levels?
Currently, Stockton leaders are floating a tax increase plan to fund¬†police officers. But money is fungible so this should be viewed as a¬†tax designed to pay for past boondoggles. Whatever the court decides,¬†it‚??s time for the public to stand up to these misshapen priorities.
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