View Full Version : Why Stockton, California, Is Bankrupt, And Your Town Isn't (yet?)

07-03-2012, 05:03 AM

The Stockton City Council yesterday approved a petition for bankruptcy, the largest of a city in U.S. history. Municipalities all over the country are in fiscal distress, but few are actually declaring bankruptcy. What went so badly wrong in Stockton, and what lessons can other cities learn?

First, Stockton had a huge property bubble, with median home prices rising 200 percent between 2000 and 2006. This flooded the city’s coffers with property tax revenues. Assuming the trend would continue, officials signed employee contracts that proved unaffordable. The city even agreed to a “heads you win, tails we lose” pay structure tied to the city’s tax receipts: In strong revenue years, workers got 7 percent raises, but even if revenues declined, they got 2.5 percent raises.

Making matters worse, says the think tank, in 2007 Stockton issued $125 million in pension obligation bonds. As in other jurisdictions that tried to “fix” their pension problems with bonds in the last decade (see Woonsocket, Rhode Island), this backfired: The assets Stockton bought with the bond proceeds declined in value, and the city is stuck with both a pension liability and a bond liability. And that pension liability has been a major driver of the city’s insolvency.

And a national lesson: Nobody, anywhere, should ever issue pension obligation bonds! Let’s think for a moment about what these really are. They are commonly described as a way of exchanging a pension liability for a bond liability. But really, when a city issues pension obligation bonds, it gets a bond liability and keeps its pension liability -- plus it gains an asset that offsets the bond liability. Typically, the jurisdiction invests the bond proceeds in an equity-heavy portfolio, which may lose value, but the bond liability remains fixed.

If that sounds a lot like buying stock on margin to you, that’s because it is.

We are a nation with of a lot of bad gamblers. The hot streak won't ever end...but when it does crap out...borrow down to cover the losses. Ironicly, Wells Fargo represents the investors.

And although they are now be the largest population city to go bankrupt, Jefferson City is still the King City of debt at $4 billion at filing last year to Stockton's $700 million.

How close is your town that isn't yet? Greensboro has just about the same population as Stockton and carries 220 million in debt now. But that isn't the complete number as it doesn't include pension and the like obligations so could be a lot closer...and will vote in 75 million more in bonds next election.

The Confessor
07-03-2012, 05:16 AM
Uhm, need to add Mammoth Lakes Ca, to that list of bankrupt towns.

Lets face it, it would REALLY suck to be in Anytown, CA right about now......,.

07-04-2012, 09:00 PM
Stockton sucks. But, it's not the norm for most of California. This state has its issues, but a lot of states have them right now. At least it's not run by a bunch of illiterate hillbillies.

07-04-2012, 09:56 PM
Yea it's a rough area, produced some tough dudes though



07-04-2012, 10:02 PM
UOP's a nice campus there, great place to watch basketball.

Outside of that, there's not a whole lot else they can really hang their hats on. Downtown's basically a ghost town, unfinished housing developments, and shut down cannabis dispensaries. They've got a brand new minor league stadium and arena too. They overextended a lot (like most places in the SJV during that time) and ended up paying the price considerably for it. It's got some potential, but that whole area is handicapped by the good ol' boys that inhabit it.