The Wall Street Journal reported today that Stockton, California is getting ready to file bankruptcy (click here to read the full article). This economy is so bad that even some large U.S. cities and counties have been forced to file bankruptcy.
Stockton, California is not alone. The Journal reports that Central Falls, R.I. and Jefferson County Alabama have recently been forced to file bankruptcy. Stockton is set to be the largest U.S. city ever to seek bankruptcy protection. Bridgeport, Conn. who filed in 1991, currently holds the record for being the largest city to file bankruptcy.
The two main causes of Stockton’s financial problems are:
- lower property values and
- rising pension obligations
The Journal reports that “median home prices here have fallen from their 2005 peak of $407,000 to $118,000 as of February, according to local officials.” This is a 71 percent drop! When the home values drop, the amount of money that a city collects also drops. Avoiding bankruptcy is almost impossible when you have a 71 percent drop in income. Current economic conditions have forced Stockton to file bankruptcy.
Stockton has done everything it can to try to shore up their economic situation. The city:
- reduced its police department by 25 percent.
- cut its fire department by 30 percent.
- defaulted on some of its bonds.
- gave up control of three city garages.
- gave up an eight story building that was supposed to be the new city hall.
The Journal reports that despite these draconian cuts, the city will still face a 26 million dollar budget deficit for the coming year.
The bottom line is that a budget has to work for a city just like it does for a family. When the creditors stop loaning money, the gig is up. Its all about the math.
Its terrible that many retired Stockton workers will not receive the pension money and health benefits that they were promised. I’m sure many of these workers gave up careers in the private sector to work for less annual salary for the city government because of the great retirement and healthcare benefits that were promised.
Once the economy recovers, I predict that local governments will have a difficult time attracting talented workers unless the salaries match the private sector. Working for the promise of a good government retirement has lost its luster.
As a Georgia bankruptcy attorney, I have seen many retirees that used to work for Delta get hammered by Delta’s bankruptcy. Many pilots who spent their careers working hard for Delta had the rug ripped out from under them when their pensions were wiped out.
I pray that this economy will recover soon because if it does not, more municipal bankruptcies will harm a lot of retired workers.