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Fiscal woes show Stockton’s history of poor decision-making

One of a long list of missteps said to be pushing Stockton toward becoming the biggest U.S. city to declare bankruptcy is a promise of free lifetime health care for some workers, estimated to cost $417 million over the next 30 years.

California’s thirteenth largest city, population 292,000, also issued an ill-timed $125 million bond in 2007 to cover pension costs. The bond money shriveled to $82.5 million when CalPERS had huge investment losses in a stock market crash a year later.

Now Stockton officials think that if CalPERS lowers its earnings forecast from 7.75 to 7.5 percent next month, the city’s annual pension payment could increase by roughly $6.7 million in 2013, about $4.4 million from the deficit-ridden general fund.

The city council voted 6-to-1 Tuesday for a financial rescue plan that, among other things, suspends $2 million in bond payments and calls for mediation under a new state law to persuade creditors, mainly bondholders, to accept less than owed.

City officials said the mediation is a last-ditch attempt to avoid bankruptcy by closing an estimated $20 million general fund deficit next fiscal year, which could balloon to $38 million if a union lawsuit overturns city-imposed cuts in worker benefits.

Though located in prime farm land with an inland port, Stockton has been troubled with above-average rates of poverty, crime, unemployment and now home foreclosures. It has twice topped Forbes magazine’s “Most Miserable City” list.

The city had a housing boom before the recession. New housing permits hit 3,000 in 2005 and median home prices $400,000 in 2006. Only 152 permits were issued in 2010 and the median price is now around $140,000.

The city borrowed heavily during the boom for the pension bond, a new arena, marina improvements and other projects. The city issued a $40.5 million bond in 2007 to buy a bank building for a new city hall, but has since lacked the money to move in.

A consultant’s report said most debt, $657 million, is secured by restricted revenue. The deficit-ridden general fund backs a debt of $319 million, an unusual step needed in some cases to improve the credit rating for lenders skeptical of Stockton.

After the recession hit, the city declared a fiscal emergency in 2010, which was extended for a third year Tuesday. The city has frozen pay, required workers to make the employee contribution to CalPERS and set limits on city payments for health insurance.

The total workforce, 1,886 in fiscal 2008, has dropped to 1,424. Sworn police officers have been cut from 441 to 343. Last year nearly 50 firefighter positions were eliminated.

“I find this city currently in quick sand,” said Councilmember Diana Lowery. “It is so difficult for all our residents. From a public safety perspective, we constantly hear daily the problems that exist with our public safety issues.”

In July 2010, Mayor Ann Johnston and the council hired a city manager, Bob Deis, with three decades of experience in three states. He was told to fix longstanding problems and set the city on a course toward solvency.

Deis and Laurie Montes, the deputy city manager, told the council they found bookkeeping errors, overdrafts, about $2.7 million in uncollected bills and fines, a tendency for staff to make decisions without telling the city council and other problems.

“There is no one event, no one decision, no one person that you can attribute Stockton’s financial situation to,” Deis said at a newsconference last week. “It’s an accumulation of things that occurred over the last 20 years.”

Deis has been in a long-running dispute with unions, who accuse him of using reductions needed during the recession to exaggerate the city’s financial problems and make excessive cuts in employee pay and benefits.

The police union famously bought a house next to Deis and has used billboards to deplore the layoff of cops, tally homicides, call Stockton one of California’s most dangerous cities and post the city manager’s phone number.

The clash continued during a council meeting of nearly six hours Tuesday night. A number of audience members accused Deis of presenting phony and incomplete financial data. They vowed to work against the re-election of council members.

Deis refused to answer a question from the lone vote against the financial package, Councilmember Dale Fritchen. His reply, “You know the answer,” suggested that Fritchen was asking rhetorical questions to sway the television audience.

The council agreed with Fritchen’s suggestion that an independent agency should investigate whether “persons or entities” contributed to Stockton’s financial plight, not the city manager and city attorney as recommended by Deis.

Vice Mayor Kathy Miller said later “folks at home watching this” should know that nearly all of the speakers during public comment were union members or retirees “with a vested interest in continuing the dysfunction of this organization.” One of the speakers, Dwayne Milnes, the Stockton city manager from 1991 to 2001, now heads a new group, the Association of Retired Employees of the City of Stockton.

Milnes reminded the council that he had sent them information showing that “it’s a myth that employees could retire with full medical after one month,” a reference to a well-publicized remark made by Deis at the news conference last week.

Deis replied that Stockton in the 1980s offered retiree health care usually limited to seven years or age 62. He said the problem began in the 1990s when the city began offering lifetime retiree health without proper funding.

A “perfect storm” resulted, said Deis, when increased pension benefits during the 1990s and early 2000s allowed employees to retire earlier and receive lifetime health care for themselves and their spouses.

Under some of the plans, said Deis, a person with four years and 11 months of service with another employer such as Modesto could work one month at Stockton and be eligible for free lifetime health care.

A “second opinion” report prepared by a consultant, Management Partners, which supported Deis’s general findings, said Stockton retiree health care costs $15 million a year ($9 million general fund) and is projected to be $30 million ($16.8 million general fund) in 10 years. (See p. 251.77)

Mayor Johnston and others said labor has contributed to a solution, a tax increase is not feasible and deeper service cuts would be damaging. So bondholders will be asked to contribute during mediation.

The process authorized by AB 506 last year is expected to cost the city about $3.5 million and take up to 90 days. If mediation fails, some think the process could help prepare the city for bankruptcy, saving time and money.

The city hired a bankruptcy attorney, Marc Levinson, who worked for Vallejo during its bankruptcy. He said Vallejo’s main bond creditor, Union Bank, refused to negotiate and in bankruptcy court received only $30 million of $50 million owed.

“Everybody has to make concessions to make this work,” Levinson said of the Stockton mediation. “They are owed collectively over $300 million. They are not going to wal
k away from it easily.”

Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ 


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