Last week, I wrote about the real fears and problems of unsustainable pensions. This week pensions are at the heart of an entire city declaring bankruptcy.
Stockton, California is now the largest city in U.S. history to declare bankruptcy. In a City Council meeting June 26, Stockton officials voted 6-1 to take this ultimate step in hopes they can save their city. Stockton is the 7th city in the U.S. to file bankruptcy.
With nearly 300,000 residents, and owing around $700 million, the City Council felt they had no choice other than bankruptcy. They’re expected to file Chapter 9 bankruptcy before the end of the week for protection against its creditors.
Pensions were the main culprit. The city had unsustainable benefits for city employees and retirees. Stockton, like many California cities lets employees retire as early as 50 or 55 years old. Some public pensions pay more than $100,000 per year. The statewide monthly average is $2,332 under California Public Employees’ Retirement Systems (Calpers). The average retirement age is 60.
While Stockton will cut retiree healthcare coverage, it does not plan to alter pension plans for fear of a battle with Calpers. Cutting employee and retiree healthcare benefits will save the city $7 million for one year and then will phase out the benefit.
During the 1990s, the city expanded its generous healthcare benefits to retirees. Today, the city faces a liability for its retiree medical program in the amount of $417 million.
Another major blow to the city was the collapse of the housing market three years ago leaving the city swimming in foreclosures. Stockton has the second highest rate of foreclosures in the country and the second highest rate of violent crime in the state. Unemployment in May 2012 was estimated at 17.5%. The last time unemployment was under 10% was in 2007
In the mid 2000s the city built a beautiful marina, high-rise hotel and promenade mostly financed by credit. The working class city tried to reinvent itself, offering generous city employee pension plans and benefits to draw a higher working class. Thousands of people from the San Francisco Bay area bought affordable homes and moved there. The community was bustling up until 2009.
It’s unclear how long it will take for the bankruptcy to make its way through the courts. Vallejo, California, filed for bankruptcy in 2008. They emerged last year with reduced payments for its retiree medical program. There are numerous other cities in California who have deficits, high unemployment and a voluminous amount of foreclosed homes.
What will happen next, or how Stockton’s fall will affect the rest of the state is anyone’s guess, but there is widespread fear Stockton is only one of at least another 20 cities who
will be forced to file for bankruptcy in the very near future. Other cities hit hard by the housing bust and budget crisis are trying to negotiate with employee unions. Central Falls, Rhode Island filed bankruptcy last August after failing to win union concessions. Providence, Rhode Island faired better with unions restructuring pension plans by excluding any cost of living increases for the next 11 years. Detroit, Michigan is on the verge of filing bankruptcy. Detroit owes $200 million and has been using all their cash reserves just to provide basic service to the residents.
There is a real fear of a domino effect leading to a more depressed economy with millions more foreclosures. Small businesses counting on payment from the cities will be forced to close their doors leading to more unemployment and more foreclosures. Experts are speaking out saying we’re only seeing the tip of the iceberg if significant reforms aren’t made on both the spending side and revenue side. The money going out to pay for pensions just isn’t there. Retirees and unions are dependent upon the pensions.
Cities filing bankruptcy face an uphill battle. Not only do they have to deal with creditors, they have to streamline money spent on services and still try to retain and attract residents and businesses for tax revenue. Not an easy task.
Keith A. Gantenbein, Jr. is a Colorado foreclosure defense attorney located in Denver and servicing all of Colorado. He also handles bankruptcies, mortgage negotiations, lender liability, real estate, civil litigation, contracts and landlord/tenant. If you think you will be facing foreclosure, or are in the foreclosure process, or have had a wrongful foreclosure, contact Keith Gantenbein at (303) 618-2122 for a one-hour consultation where he will discuss your situation and go over all your options with you.
This article is not intended as legal advice. The opinions of this article are solely the opinion of the author.