First Vallejo, then Stockton, then Mammoth Lakes and now San Bernardino. As Orange County Supervisor John Moorlach told Bloomberg News, the bankruptcy dominoes are starting to fall. One California city after another — following a decade-long spree of ramping up public-employee pay and pension benefits, as well as redevelopment debt — are becoming insolvent.
Not that the state’s legislators have anything constructive to offer. California’s Democratic leaders are not only unwilling to rein in the costs of benefits for their patrons, the public-sector unions, but they have been erecting roadblocks to those localities that want to fix the problem on their own. Yet all the political blockades in the world cannot fix the basic problem of insolvency.
Stockton negotiated the new process created by a state law requiring a 60-day period of negotiations before filing for Chapter 9 bankruptcy. That period is over and the city – a hard-pressed port on the edge of the California Delta – has become the largest city in the country to pursue municipal bankruptcy. The cause was a pension system eating up 30 percent of the budget, an absurdly generous retiree medical program that provided lifetime benefits after working for the city for a short period, and excess bond debt for pension obligations and redevelopment projects.
Soon after, Mammoth Lakes decided to pursue bankruptcy. That city’s problem came after it lost a judgment in a development case. Although not tied to public-employee compensation, the situation was caused by city officials who prefer to play developer than tend to the nuts-and-bolts of city government – a long-term problem in that eastern Sierra vacation town. In 1996, Mammoth Lakes lost a court case after it declared its downtown area blighted because of excess urbanization, in a ruling the judge said exemplified the misuse of redevelopment power.
The latest city to declare bankruptcy is San Bernardino, which has declared an emergency situation that will allow it to evade the negotiation period mandated by state law. The city simply doesn’t have the cash to keep operating. As Bloomberg reported, “San Bernardino and its agencies have more than $220 million of debt, including $48.6 million of taxable pension-obligation bonds, according to financial statements.” Pension-obligation bonds are used by cities to pay ongoing pension expenses, yet San Bernardino’s problems show that a city cannot borrow its way out of debt.
Other big cities, including Los Angeles, are talking more openly about the bankruptcy option. Not long ago critics who mentioned the B-word were considered Chicken Littles.
The latest talking point is that these cities couldn’t control what happened to them – that they were victims of the foreclosure crisis that rocked the inland areas where housing construction boomed during the housing bubble.
Foreclosures
The Riverside Press-Enterprise reported: “The city of San Bernardino’s financial woes are a directly correlation to a torrent of foreclosures in the Inland area of Southern California, the national foreclosure tracking firm RealtyTrac said Thursday. ‘Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,’ said RealtyTrac vice president Daren Blomquist.”
There’s no doubt San Bernardino and Stockton — Ground Zero for the housing crisis — suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know – they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals. They squandered the money when it came flowing in, now depict themselves as victims of circumstance when the funds dried up.
The real culprit, as I argue here in City Journal, is foolish decision making. Stockton, for instance, refused to take advantage of an exemption in prevailing wage laws – something that could have saved it money but would have angered the powerful unions.
The housing bubble hit the hardest in cities inland from the growth-controlled major metropolitan areas. When the prices went up in Los Angeles and San Francisco, developers moved inland, where it was easier to get the permits necessary to respond to the demands of the marketplace.
Coastal cities
But even coastal cities are struggling. Los Angeles is not a victim of the foreclosure crisis. Pension costs in San Jose — where the housing market has rebounded thanks to a healthy tech-based economy — rose 350 percent in 10 years and now consume 20 percent of the general-fund budget. That city passed pension reform on the November ballot to stop the fiscal bleeding.
Here Joe Mathews debunks San Bernardino’s allegations that the state is to blame for its fiscal problems: “Local elected officials who complain about a lack of state money have things backwards. The state of California is relatively spare in its spending, compared to national averages. California’s local officials are, by contrast, big spenders, at or near the national lead in compensation for local workers, especially law enforcement.”
There’s no doubt the problem is fiscally profligate local governments, who busted the bank on public-safety pay and benefit packages and now are looking to cast blame anywhere they can.
Bankruptcy is not a great option but at least it gives cities a chance to get their house in order and start fresh. Unfortunately, Vallejo and Stockton refused to tackled existing pension debt in their bankruptcy plans. Orange County emerged from bankruptcy in the 1990s in better shape than ever, but as Chris Reed explained for CalWatchdog, subsequent boards of supervisors then began spending like crazy on public-sector compensation.
Bankruptcy cannot stop future officials from wasting the taxpayer dollar. But when there’s no money, there’s nothing left to do. In Scranton, Pa., a judge issued an injunction to stop the mayor’s plan to begin paying all city employees minimum wage. But there’s no money left to pay any more than that, he said. The city will gladly pay more as soon as it has the cash to pay it.
Only when the money runs out will cities find the necessary solutions. That’s perhaps the saddest commentary on the situation in California cities these days.
(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. Originally posted on CalWatchdog.)
Bankruptcy Dominoes Start to Fall in California Cities http://t.co/nkc6SCQv
Bankruptcy Dominoes Start to Fall in California Cities: http://t.co/kUZ6j6NF
Bankruptcy Dominoes Start to Fall in California Cities http://t.co/Zi0MBtOv Only liberals could destroy a state as great as California. Wow.
Bankruptcy Dominoes Start to Fall in California Cities: First Vallejo, then Stockton, then Mammoth Lakes a… http://t.co/Si6J3eGq #tcot
When the people of the state control the purse then this problem will go away. It’s our money, and their greed, and the people’s loss of control over the money and no real compitant oversite has caused this problem. You work 25 years, ramp up your pay, accumulate sick leave, and vacation pay and retire at a $ level higher then when you were working. Now multiple every positions pay by three, because you could have one in the job, one just retireing, and a third who is 85yrs old or older still recieving his retirement also. This breaks the bank! This is not how it works in the real world!!!! We are paying for yours and can’t put anything aside for ourselves. You would think a state that brings in $900 billion a year should have enough, but when everyone in dipping into the trough over what is reasonable, then it’s never enough. The self employed can’t even do to our own companies what the public employees are doing. WE NEED TO DISBANED THE PUBLIC EMPLOYEES UNION. The public employees and Unionization is a condradiction in the first place ,it should have never happend!!! It is extremely bad economics as well. That’s the propisition that we should see on our next ballot! The movement that needs to happen is to declare the State government incompitent, and we file our tax return but not give the taxes owed to those who are blowing it away. It should all be deposited into a trust fund the THE PEOPLE CONTROL and the people decide what gets paid and what does not!!! II’S OUR MONEY!!!!! Or should we push the State to file Bankruptcy to stop them from spending more than we have.
reduce salaries, stop any mandatory union dues payments, get the unions out of city/county halls, reduce all salaries 20% and live within those parameters.
Oh the irony! “The chickens have come home to roost”, after all the man who started it all in California once again sits in the governors office, Jerry “Moonbeam” Brown elected by a totally ignorant voting public.
Yes it is sad and it is a pitiful referendum on who votes in elections today. No doubt the majority of the California were, and remain clueless as to who Brown really is. They had their opportunity to vote in a proven and successful businesswoman named Meg Whitman, and they ended taking her to task over an overpaid illegal who lied to Whitman and her husband. Of course we can all thank leftist Gloria Allred on this as well to.
You have it 100% correct!!!
These bankruptcies could be a good thing. These ridiculous wage and pension benefits need to be restructured before any meaningful reform can occur. You can’t tax your way out of this mess. This needs to start at the state level and work all the way down.
Want to stop the bankruptcy of the rest of caliporkya? Recall jerry rig and the rest of the communist party in the state’s congress and senate. That is the only way out of what will be the caliporkya capsize. If the above action isn’t taken soon expect more of the same. Remember. VOTE NO ON ANYTHING THAT HIKES TAXES. Stop feeding the marxist pinko machine. Flush brown and save California.