The city of Stockton, located in the northern half of California’s great central valley, has declared bankruptcy. This week, Judge Christopher Klein ruled that Stockton could enter into federal bankruptcy protection. This is bad news for the city’s creditors but it has been an awful situation for the people of Stockton for quite some time. The Associated Press describes the situation:
Stockton has tried to restructure some debt by slashing employment, renegotiating labor contracts, and cutting health benefits for workers. Library and recreation funding have been halved, and the scaled-down Police Department only responds to emergencies in progress. The city crime rate is among the highest in the nation.
Stockton’s financial collapse was a long time in developing despite the plentiful warning signs.
I grew up 20 minutes away from the city, lived within its boundaries for three, earned my history degree from the University of the Pacific in Stockton, served the community while working for State Senator Michael Machado for another four years, and my sister and her family live there today. It is a sad state of affairs.
Stockton in the mid 2000’s staked its future to the illusion of the booming housing market. In March of 2006, according to Zillow, the average market value for a home in Stockton was $377,000. As of January that has dropped to $133,000. High home values were the result of speculation and thousands of people fleeing the San Francisco Bay Area searching for affordable housing. While housing prices went through the roof, a corresponding uptick in the local labor market wasn’t materializing, as evidenced by the meager media income of Stockton between 2005 and 2009 of $47,426 per year.
Stockton wasn’t alone, across the valley housing prices were booming but wages stayed stagnant or declined. Some reporters were quoting real estate agents who were continually stunned about what was taking place, openly questioning how long this could continue. Mass psychosis might have been the best way to describe elected officials as they bet their cities futures on the idea that housing would never stop its accent (we did the same thing with water from the Colorado river, allocating water for California, Nevada, Colorado, and Arizona based on flood years, but that is for another blog post).
So on the eve of the greatest financial disaster since the Great Depression, the city of Stockton increased its labor force, benefits to employees, and perhaps as important but less discussed, issued a series of bonds to fund expensive redevelopment projects along the waterfront. California Common Sense’s study of the situation describes what happened next:
These employment and redevelopment decisions may have been sound if the economy and housing markets had continued to grow at the rate they did from 2001 to 2006. But when the bubble burst in 2007, everyone from individuals and businesses to corporations and governments felt the effects. Stockton’s housing prices declined over 70% from nearly $400,000 in 2006 back to $110,000 in 2009, the level seen in 2000. Naturally, the housing market decline drove a drop in Stockton’s property tax revenues. But it also had a secondary effect on other revenue sources related to home ownership, including utility user’s taxes and housing permit fees. The negative effects spilled over into sales tax and other revenues, just as the positive effects spilled over when the housing market boomed. In 2010, the General Fund revenues were 10% less than those of the previous year and 19% less than what the city originally expected.
It is useful to point out here who ended up the lions share of the increased pay and benefits from this period. It doesn’t take a rocket scientist to guess who that was after 9/11; fire and police departments. 80% of Stockton’s 2011-12 budget, nearly $160 million, was earmarked for “public safety”.
Between 2001-2006, the city leaders who helped make this all possible were Mayor Gary Podesto and City Manager Mark Lewis. You don’t hear much from or about them today, but together they embarked on an epic redevelopment plan and shelled out goodies as if there was no tomorrow. Their ill-advised spending, and Mark Lewis’s arrogance that drove up the costs of a new ballpark and convention center, are quickly fading into history.
The lessons of what has happened shouldn’t be ignored, especially by those of us who were around. To build an economy, one that will last, you have to do more than stoke a fad. Stockton should have been investing its tax spoils in a reserve fund, improvements to the local job market, refurbishing local transportation infrastructure, and improving quality of life. City officials lost sight of Stocktonians needed or wanted and now most of them are gone and taxpayers are left with the bill.