Stockton Leads the Charge for Budget Insolvency in CA

Stockton … Hercules … Lincoln … Milpitas.  The list of cities has grown to four in the span of one week.  These are all cities in California recently threatened with budgetary insolvency — where expenses exceed revenues.  All have started to explore filing bankruptcy or drastically reducing their budgets and effectively doing the same, as would happen in a bankruptcy court.

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AB 506, by Assemblyman Bob Wieckowski, D-Fremont, became law in 2011 to prevent or delay just such a run of bankruptcy filings.  The California Legislature does not want a run of cities filing bankruptcy because the state budget continues to run a $20 billion annual deficit and is unable to bail out insolvent cities.

AB 506 prohibits a municipal government from filing a federal bankruptcy unless they it either:

  1. Undegoes a neutral evaluation conducted by a third party and involving all interested parties, including unions and creditors. This applies to the cities of Stockton, Hercules and Lincoln; or
  2. Declares a “fiscal emergency” that threatens the health, safety or well-being or residents without bankruptcy protections. This applies to the city of Milpitas.

The city of Stockton has initiated the mandated neutral evaluation process preparatory to filing bankruptcy.   The city of Milpitas has declared a “fiscal emergency,” preparatory to raising taxes or filing bankruptcy if a tax ballot initiative fails.  The cities of Hercules and Lincoln have drastically reduced their budgets, as they would be forced to do by a bankruptcy judge.   But they are all in the same “fiscal” boat with budget deficits.

The Start of the Great California Muni Bankruptcy Run?

Stockton Hercules Lincoln Milpitas
Population 290,000 26,000 43,248 66,790
Median Household Income $47,946 $87,869 $60,883 $92,694
Budget Deficit $20 – $38 mil. $1 mil. $2 mil. $5.2 mil.
Percent Budget for Salaries & Benefits 82% 51%60% 1 yr. ago 83% 84%
Percent Median Home Value Decline 65% 62% 50% 33%
Deficit Reduction Strategy Determine bankruptcy feasibility Reduce 37% of employees Consultant hired to reduce costs Declare fiscal emergency prior to poll to raise taxes or file bankruptcy
Deficit Drivers:
  1. Lost $2.3 mil. in property taxes;
  2. Retiree costs grew from $8.5 mil. to $16.8 mil. in 3 years
$1.85 mil. bailout of Redevopment Agency created deficit New $16 mil. library created deficit City had to bail out Redevelopment Agency for $39 mil.

 

Each city has its own unique story as to how they ended up with an insolvent budget.

Stockton

For Stockton, it was overbuilding of homes during the Mortgage Bubble, reliance on redevelopment projects that now have gone bust and the fast growth in public pension costs.   Retiree pension costs have risen from $8.5 million per year in 2007-08 to $16.8 million in 2010-11, and the proportion of costs may continue to rise.  The median home value has dropped about 65 percent compared to about 33 percent on average in California since 2006 (CityData.com).

In 2011, Stockton had a $3.98 million hole in its operating budget to patch. The sources of that hole were: $2,323,600 in declining property taxes, a $1,047,000 loss of vehicle license fees and $700,000 in fire department overtime.  SB 89 diverted $130 million in vehicle license fees statewide from cities to counties to help pay for prison realignment.

Hercules

For the City of Hercules, located in the north San Francisco Bay, the median home price has plummeted from $650,000 in 2006 to $250,000 in the third quarter of 2011 (CityData.com).  That reflects a whopping 62 percent decline and a decreasing property tax base.  Hercules took a $1.85 million hit to bail out its redevelopment agency when Gov. Jerry Brown ended redevelopment this year. That bailout pushed the city into a $1 million deficit on its budget balance sheet.   Hercules lost $87,107 in vehicle license fee revenues under prison realignment.

Lincoln

For Lincoln, a small community north of Sacramento, it was the debt on a new $16 million library that pushed its budget into a $2 million annual deficit. According to CityData.com, the median home value in Lincoln dropped from $500,000 in 2006 to $250,000 in the third quarter of 2011, a 50 percent decline. Lincoln lost $146,154 in vehicle license fees under prison realignment.

Milpitas

Milpitas, a suburb of San Jose located in the South Bay, was hit with a $39 million cost to bail out its redevelopment agency, which shoved the city budget into a deficit.  Median home values have declined relatively more modestly in Milpitas, from $600,000 in 2006 to $400,00 by the third quarter of 2011, reflecting a 33 percent decline, according to CityData.com.  Milpitas lost $252,859 in vehicle license fees under prison realignment in a city running a $5.2 million budget deficit.

Bankruptcy as ‘Reputational Stain’

The biggest decline in municipal revenues has been in sales taxes, however, for all cities.  If it were not for Proposition 13, property taxes would have declined even further. Prop. 13 has a “circuit breaker” built in to it to prevent a free fall in property taxes. Cities also lost the revenues from vehicle license fees in 2011.

State Treasurer Bill Lockyer was quoted in the Wall Street Journal saying he wants to avoid the “reputational stain” of a wave of municipal bankruptcies because it would make it difficult for the state to raise funds in the bond markets.  Bond underwriter Richard Larkin of Herbert J. Sims Co. said that, as the number of bankruptcies mounts, bond interest rates will rise.  AB 506 may not be enough to push back a tidal wave of bankruptcies and higher bond borrowing costs from happening.

In turn, those higher bond interest rate costs will be added to the debt line item in city, county and state budgets, putting more pressure on other line items in each budget.   Cities are caught in a downward spiral of revenues that local tax initiatives may not be able to entirely fix.  As revenues continue to ratchet downward any, “tax fix” may only be temporary, requiring yet another and another tax fix.  Bankruptcy, or voluntary budget reductions, may be a better way to go because either offers a way to control costs instead of a death spiral that tries endlessly to raise revenues — even as the tax increases themselves drag the city down.

(Wayne Lusvardi is a Political Commentator and writes for CalWatchdog, where this article was first posted.)

Comments

  1. The fix is easy before it has begun. Federal, State, County, Municipal budgets are easy to manage; it is as simple as having a good bookkeeper or accountant; the assets and liabilities must balance at all times and that is the problem cross country– overspending which can be avoided but is neglected. Look at the Federal deficit…why spend in a huge military force and wars, etc. when it can be avoided? The same is true at the city level…big spending with things which are not necessary. A good example is the new library in the city of Lincoln…something which is not necessary. Another example I can mention is the High School in Los Angeles which cost 565 million dollars; those are the things which can drive a city into deficit and that it could be avoided. The bottom line is that government, Federal or State, always spend without looking at the consequences farther down the road. What is the solution? To have qualified management personnel and for sure getting rid of those politicians with deep pockets.

    • Al Metcalf says

      All of these towns are going down the tube for exactly the same reason. When a bureaucrat is elected to office he gets the purse in his hand and also the ability to spend far beyond his term in offce. So as he shuttles off to some form of retirement, which is a rape of the taxpayers, he leaves behind more debt for someone else to manage.
      Everyone, it does not make any difference who or what party, they all want many, many goodies at someone elses expense. Orange County just a few years ago built the Taj Mahal Fire Department Building for tens of mellions of dollars. Why? Because the bureaucrats sat down and decided they needed this huge magnificent building to show just how important they are. Bureaucrats!!! The bane of all free society. Talk about drunken sailors, elected clowns make drunken sailors look like babies, for the drunken sailor must spend his own money. The sober Bureaucrat has a credit card and he does not have to ever pay the bill.
      Did you ever go to a City meeting and try to slow down some of the spending by the NUTTY CLASS? Good Luck!!
      Lincoln, 45K people with an avg income of $60K. Do you really think that they really voted for this $16,000,000.00 library? This amounts to each person in the town donating $350 towards the project. And if this is like every other govt project it will cost 10X by delivery to the public.
      We need to get on with the bankruptcy of all of the Towns, Cities, Counties and then the State itself. Then we can start over and this time lets all vote for adults who actually understand what Public Service means. It does not mean to feed at the trough until you cannot stand up!! Nor does it mean to load up the public sector with all of your relatives. Nor does it mean to create as many bureaucracies as you can so you can provide funding for all of your peeps and goons like Obama.

    • No, we simply need to get rid of those politicians who think they have unlimited access to OUR pockets. Then we need to eliminate something like 80% of the programs they now spend our money on. If that takes firing 80% of government workers and eliminating their bloated pensions, so be it. Oh, and tell the unions to take a hike at the same time.

      It is OUR money and we expended OUR lives to earn it. They do not have a right to it. Even if it is said to be legal by the laws THEY wrote. They nor the government has the right to violate our individual rights and the violation must be stopped.

  2. Not a word for costs associated with illegal aliens and their progeny, not to mention
    legal aliens on the dole.
    Our state and our country are going down and there is not a thing that can be done.
    It is not the bad people ruining our country but the good folks with their greed and
    special interests.

  3. F L TERRY says

    I remember a major lawsuit against the city of South Tuscon, AZ and that city’s filing for bankruptcy. The incident involved a police officer shooting another police officer, and it happened about 15 years ago (I don’t remember the exact date, sorry.) The case went all the way to the Supreme Court and the SC ruled that a City can’t declare itself bankrupt because a City has the power to levy taxes on the residents. Since then, CA voters passed prop 13, which hampers (but doesn’t preclude) the ability to levy taxes. If Fresno, and the rest of these cities, think they have it tough now, wait until they try to fund a supreme court case!

  4. You can blame the unions for high salaries in our government ,School system, are going to bankrupt the country. People retiring at 52 then getting another gov job sucking on the gov tit this has to stop. Raising taxes is not the silver bullet , all they want is moor money to spend on new gov and school buildings yet higher salaries like Obama said to hire qualified people, if we had people with common sense we would not be in the pickle we are in. To many people in gov over reaching their power. The gov is here to help you “beware”!!

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