Finance

Stockton, California’s Bankruptcy Makes 'Normal' Cities Nervous

Unlike many high-profile bankruptcies, Stockton’s financial woes are the result of many different factors that are not unusual for many localities.
by | May 2012

There’s not a big, identifiable problem that’s driving Stockton, Calif., into bankruptcy. That’s why other cities are worried about its example.

Many of the high-profile public-sector bankruptcies over the past few years were triggered by massive projects that went bad, like the $3 billion sewer bond problem in Jefferson County, Ala., or Harrisburg, Pa.’s big incinerator. That has allowed municipal mavens to argue that forecasts of waves of bankruptcies from the likes of analyst Meredith Whitney are overblown.

The central California valley town of Stockton, however, has no such signature failure. Its woes are the result of a combination of many different factors.

Sitting beyond what was once considered the outer edge of the Bay Area, Stockton has been particularly hard hit by foreclosures. Its retirement benefits have been on the generous side -- people who worked for the city for as little as a month could count on health coverage for life. It also borrowed money during boom times for some high-profile projects along its waterfront. The city made some poor decisions, but nothing hundreds of other places haven’t done.

Because its recipe for disaster was not unusual, many other California cities are nervous. City officials from Fresno to San Jose are using Stockton as a warning of what could happen if they aren’t able to trim pensions and make other changes to what has been standard operating procedure. (Please read Stockton, California's Debt Problems May Set Precedent.)

“Stockton’s predicament varies only in degree from the woes faced by many other local governments in the state that acted as if the good times would last forever,” editorialized the San Francisco Chronicle. “It may be the largest to face bankruptcy, but it likely won’t be the last.”

Michael Coleman, a fiscal consultant to the League of California Cities, says such warnings are still too dire. Stockton depended too much on revenue fueled by new growth, he says. Once things started to go wrong, city officials gambled on risky debt financing schemes that ended up costing them plenty.

But Coleman concedes that cities in California, as elsewhere, have a long way to go before they can feel secure. “Local government still faces struggles for the next several years,” he says. “I think we’re still three or four years away from significant revenue growth.”

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