Detroit, of course, has taken over the dubious honor, but Stockton, Calif. was the country’s largest municipal bankruptcy when city leaders filed Chapter 9 in August 2012 with a reported budget shortfall of $26 million. (The city of roughly 300,000 has an annual budget of $521 million.)
What’s been at issue in the northern California city’s fiscal woes, according to Time magazine:
There are many reasons why Stockton was one of the hardest hit American cities in the Great Recession – a housing bubble, debt spending on white elephant projects (like a downtown arena which is rarely full), fiscal mismanagement, and unrealistic pension return expectations and under-funding during boom times all played a part.
Next Chapter’s Detroit Journalism Cooperative partner Bridge Magazine sent writer Ron French there last year as well as to nearby Vallejo, Calif., which had recently exited bankruptcy. French reported being told “you ain’t seen nothing yet” as he looked to those cities for what Detroit might expect as it moved toward its own bankruptcy filing:
Our postcards from those troubled cities aren’t pretty. Both face problems strikingly similar to Detroit. And while few question the necessity of the bankruptcies, residents wonder whether the painful fiscal fixes will be enough to keep the cities afloat.
One of Stockton’s widely reported problems is the effect of the exodus of city workers, mainly cops. It seems that public sector workers in California cities where leaders attempt money-saving pension reforms often transfer to other municipalities. About 90 percent of cities are under the state pension system, so workers retain their benefits when they change, say, police departments. But as Stockton lost police officers faster than it could replace them, 2012 saw a huge spike in crime, Time reports.
Voters there approved a sales tax last year to pay for 120 new police officers. Funds from the tax are also targeted for other city operations and should help the city emerge from bankruptcy. A citizens watchdog committee is in place to oversee the spending.
Meanwhile, Stockton has filed and the city council approved its Plan of Adjustment. The city’s bankruptcy trial is scheduled for May 12. One creditor remains, Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund, and the sides are not close to an agreement, reports The Record, Stockton’s local newspaper.
Still, the city projects a $10 million budget surplus when the fiscal year ends in June.
Turnaround, quite possibly, is happening there.
Detroit’s Emergency Manager Kevyn Orr is ramping up the rhetoric about the Detroit Water and Sewerage Department, pushing the idea that it could be sold and privatized if the city doesn’t reach a regional agreement with suburban communities.
“I do think we’re at a crossroads now having had this discussion for decades about DWSD,” Orr told The Detroit News in an interview Tuesday. “We’re going to run on parallel tracks. We’re not walking away from the creation of an authority. We’re going to start looking at other alternatives as well.”
With Orr’s Plan of Adjustment calling for paying pennies on the dollars to creditors, including bond holders, and slashing pension benefits by almost 30 percent for some retirees, the governor-appointed EM needs to also find revenue generators for the cash-strapped city. DWSD is one of his few options with such potential.
Suburban leaders haven’t exactly been receptive. Some of them are telling the News that their counterproposals to Orr’s suggestions are rebuffed.
“By and large, this hasn’t been a negotiation,” said Robert Daddow, deputy county executive for Oakland County. “It’s been a stampede to an end point. We’ve been stuck in first gear for a long time because everything we put on the table gets rejected.”
Some of the obstacles, they say, are DWSD’s roughly “$1.5 billion in operating losses over the past seven years; more than $500 million in abandoned projects, and more than $500 million to terminate bad debt; $142.5 million in unpaid water bills; and fears that an authority’s dismal credit rating would make it difficult to issue bonds.” There are also the potential $60 million annual payments that Crain’s Detroit Business reported could be owed by the suburbs for DWSD pensions if a regional deal isn’t worked out.
With an April 18 deadline set by Bankruptcy Judge Steven Rhodes for the city’s final disclosure statement “resolving any objections that the Court has sustained,” the parties continue to meet. But there are no public indications that a deal is anywhere near done.
U.S. public pensions need more than investment windfall
It’s no secret that pension funding is a concern in municipalities and states around the country, but this Reuters piece, published in the Chicago Tribune, presents a bit of a balanced view about how dire (or not) the situation may be.
Indeed, there is evidence that the overall health of pension systems is brightening. A report released by the Federal Reserve last week said liquidity of pension funds has improved.
…many are still struggling with shortfalls. In some cases, they have worsened as state contributions fail to keep pace with what is needed to pay beneficiaries. … Roughly half of U.S. state pension plans have worrying gaps between what they have promised retirees and the funds on hand to pay benefits, according to most analyses.
However the pension funding situations play out across the country during the next few years, it’s clear that Detroit is setting precedent. Emergency Manager Kevyn Orr’s Plan of Adjustment calls for changes in the governance and administration of city employee plans. It remains to be seen to what extent those will be negotiated or whether they will be part of a forced settlement in the bankruptcy case.
After four years in a financial emergency, it’s over for Benton Harbor. Gov. Snyder Monday announced in this news release that he has appointed a Receivership Transition Advisory Board”to help ensure a smooth transition and guide the city to continued financial stability.”
Tony Saunders II was the second emergency manager there, and he spoke to Michigan Radio about what he did and what the next steps are for the west Michigan city.
What does Saunders think will help keep cities out of financial emergencies?
“People have to be willing to make tough decisions,” Saunders says. “As long as individual and elected bodies are willing to make those decision, I think that the likelihood they’ll return to emergency management decreases dramatically.”
“Public myths are necessary to the sustenance of political order, but bad myths can undermine democratic decision-making.” So writes Bridge Magazine in a discussion about whether the “firemen first principle” should be informing as much public budgeting as it is. The principle holds that if taxpayers are opposed to public spending, threaten them with the elimination of firefighters. That’ll change their minds…but should it?
Among Emergency Manager Kevyn Orr’s talking points on the city’s Plan of Adjustment and Disclosure Statement, filed Feb. 21, are a few messages about the future of the Detroit Water and Sewerage Department:
*A proposed regional authority would be called the Great Lakes Water and Sewer Authority;
*Discussions have taken place for decades about regionalizing the water system;
*City and suburban leaders met Tuesday, Feb. 18 and made progress in their talks, which are continuing.
Which leads to the reasonable conclusion that Orr can’t be too happy about an article in today’s Macomb Daily based on a two-week-old memo leaked to a reporter. “Portions of the detailed, 11-page memo indicate that Oakland and Macomb leaders fear that they are being scammed,” Chad Selweski writes. (Incidentally, he doesn’t post the memo.)
The article trots out the predictable, nearly sensationalized suburban suspicions that seem to surround many things Detroit. In this case, they’re focused on the negotiations and proposals for what to do about DWSD. Have negotiations been perfect? Of course not. Environmental groups, for example, have called for more transparency and openness, and suburban leaders should be diligent about understanding a regional deal.
But Selweski quotes Macomb County Commissioner Jim Carabelli, a Shelby Township Republican, as saying “I’m a little appalled with the deal that’s on the table. It’s such a bad deal … (this) is some scary stuff.”
Scary? Yes, the bankruptcy is scary. The pensioners facing a 30 percent cut to their retirement payments would likely agree.
The memo, according to the Macomb Daily, reads, in part, “The DWSD … needs continuing, widespread reform – in financing, in operation and maintenance, in purchasing, in capital improvement, in technology, in personnel and labor optimization, and in service delivery.”
How about suburban leaders offer some constructive options for those goals instead of quips that rely on anti-Detroit sentiment?
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com