* City manager: Retirees' healthcare "a Ponzi scheme"
* Police officers can retire at 50 years old with pension
* No early signs of alarm about city's fiscal mismanagement
* Stockton's fortunes linked to housing boom and bust
By Jim Christie
SAN FRANCISCO, July 4 The man in charge of the
biggest U.S. city ever to file for bankruptcy is clear about the
root of the crisis.
It was a decision that gave firefighters full healthcare in
retirement starting on Jan. 1, 1996, s aid Bob Deis, the city
manager of Stockton, California.
At the time, the move seemed cheaper than giving pay raises
s ought by unions, officials involved in the decision said. When
other Stockton employees demanded the same healthcare deal in
following years, the city agreed.
Deis, who signed Stockton's bankruptcy filing last Thursday,
s lammed the decision to provide free healthcare to retirees as a
"Ponzi scheme" that eventually left the city with a whopping
$417 million liability.
Before the turn of the millennium, things looked very
different in California.
The U.S. stock market was booming, bolstering Stockton's
p ension funds. Real estate values were about to soar, too,
bringing a flood of new tax revenue to the once quiet farming
town of about 300,000 people - abo ut 85 miles east of San
Fran c isco - in California's Central Valley.
To counter demands for wage hikes from city workers in the
1990s, Stockton offered to extend their health insurance in
retirement past age 65 - a benefit they embraced and assumed to
be rock solid until the insolvent city's officials put it on the
chopping block in a bankruptcy plan last week.
"It was a balancing act," said Dwane Milnes, Stockton's
city manager at the time. "The unions wanted retiree medical ...
We said if you want to continue your medical for current
employees and retirees, you'll have to do it through wage
Milnes, who represented Stockton's retirees in recent talks
with City Hall, said the strategy was sound at the time.
"We were satisfied that based on a conservative view of the
economy and based on the medical inflation rate we were
experiencing in the 1990s, the city could adequately fund
Detective Mark McLaughlin said Stockton's labor unions
embraced the trade-off, which in the police department's case
helped with recruiting and retention.
"It was an easy sell," he said, adding that city workers
believed the money they gave up in pay increases would be able
to pay for the health benefit.
SPEND, SPEND, SPEND
Other U.S. cities have also experienced boom and bust like
But analysts and investors generally see Stockton as an
extreme case of fiscal mismanagement over the past two decades.
Daniel Berger, a senior market analyst at Municipal Market
Data, a unit of Thomson Reuters, said last week, before the
bankruptcy filing, that the municipal bond market had viewed
Stockton's fiscal problems as "a slow-moving train wreck." The
possible bankruptcy filing, he said at the time, was seen as an
As the 2000s advanced, Stockton continued to spend freely
with the support of voters, politicians from both parties,
employees and bondholders. Rating agencies were quiet about any
risks and only started to downgrade the city's creditworthiness
two years ago.
Generous pension deals were offered in the early 2000s.
City officials, looking to transform their sleepy downtown,
approved spending on large projects to raise Stockton's profile
and turn it into a bedroom community for San Francisco and the
Homebuilding went into overdrive. Home prices skyrocketed to
a median of nearly $400,000 in 2006 from a median of $110,000 in
Stockton's revenues jumped, too. Its general fund, which
pays the city's operating costs, swelled to $186.4 million in
2007 from $139.1 million in the 2001 fiscal year.
Like other cities in California, Stockton chose to offer
many public safety workers the same benefits as those mandated
by a state law for highway patrol officers. The change allowed
police officers to retire at 50 with pensions based on 3 percent
of final pay for each year in service, up from 2 percent before.
City employees in other unions also received more generous
pensions with eligibility to retire at age 55 - with 2 percent
of final pay multiplied by the number of years of service.
This is in contrast to the vast majority of private-sector
workers who cannot receive Social Security p ayments b efore they
are at least 62.
By the 2000s, Stockton's full-time employees were also
entitled t o free healthcare for life.
Still, there seemed little cause for concern.
With huge stock market gains from the 1990s, city officials
were confident about meeting pension costs. After all, the
Standard & Poor's 500 Index index quadrupled between
early January 1990 and late March 2000.
Police and firefighters continued to win further
concessions. Generous allowances were offered to police officers
to buy their uniforms, bonuses were introduced based on years of
ser vice, and retiring officers cla imed cash payments for unused
vacation days - accumulated over years in some cases.
Warning signs grew that retiree healthcare costs were rising
fast. The city miscalculated the rate of inflation for medical
costs during the 2000s.
But Stockton's leaders burned through their reserves and
began planning new construction projects to make the city more
appealing to new residents.
A $47 million bond issue in 2004 was meant to finance
construction of a sports and concert arena to revitalize t he
city's do wntown. The arena was built, but it ended up losing
A downtown high-rise building was acquired for a new City
Hall. A revamp of Stockton's downtown riverfront was financed,
along with other projects, by more than $100 million in debt
between 2004 and 2006 by the city's redevelopment agency.
Stockton ended up absorbing that debt after California's
governor eliminated local redevelopment agencies last year.
It seems unlikely that Stockton will be able to sell those
real estate assets at a gain.
"Most of the assets that look nice are under water," said
Deis, the city manager.
A $125 million pension obligation bond sold by Stockton in
2007 also backfired. Stockton passed the proceeds to the
California Public Employees' Retirement System, or Calpers, to
pay down unfunded liabilities at the pension fund. Then the fund
suffered steep losses when financial markets plunged in 2008 and
early 2009 and left Stockton with a 23 percent loss on its
invested proceeds and in debt to investors who bought the bonds.
HOUSING BUST'S TRAIL OF PAIN
The worst damage was done by the housing crash. Median home
prices in Stockton slumped to $110,000 in 2009, erasing nearly a
decade's gains. General fund revenues in the current fiscal year
are projected at $155 million, just above their level in 2001.
The real estate bust made Stockton one of the foreclosure
capitals of the United States. Property-tax revenues tumbled.
The city began its new fiscal year on July 1 with its
1,420-strong workforce down by a quarter from three years
Debt service has ballooned to $17.2 million a year from $3
million just six years ago.
Stockton has already defaulted on about $2 million in bond
payments since February.
Recriminations about Stockton's budget need to be set aside
to avoid the kind of lengthy bankruptcy suffered by Vallejo,
an other California casualty of the boom-to-bust cycle. It
emerged from bankruptcy last year after three years in Chapter 9
that cost it $10 million in legal fees.
Stockton has earmarked $3.5 million for bankruptcy court
expenses b ecause it h opes for a quick e xit from Chapter 9.
Bondholders, employees and retirees will be hurt in the
process. Axing retiree medical benefits is now central to
efforts to restructure Stockton's finances, Deis said.
Many retirees are in a state of shock about that.
"I believed the city would honor its commitments," said Geri
The former clerk retired last year after 26 years with
Stockton's police following a second heart attack.
Ridge lives off a monthly pension of $1,895. She learned on
Friday that she now faces a $576 monthly premium for her health
co verage - or $1,277 a month if sh e keeps her daughter on her
She has no idea of how to pay for the coverage, which the
city will fully eliminate in a year. And she has harsh words for
"I want him gone. I'm hoping whoever gets elected into
office fires him, bankruptcy or not," Ridge said.