Cities on the Brink

Municipal finance chiefs are fighting to keep their troubled cities solvent. Sometimes it’s a losing battle.

Prior to its incorporation in 1850, Stockton, Calif., was known as Fat City, and later Mudville. Prophetically, its financial fortunes followed this progression in names from boom to bust. Stockton filed for bankruptcy in 2012, and until Detroit went bankrupt earlier this year, it had the dubious distinction of being the largest city in the country to seek Chapter 9 protection. The cities are two of 12 other municipalities that have petitioned for bankruptcy protection since 2008, among them Jefferson County, Alabama; Harrisburg, Pennsylvania; and Vallejo, California. Eight of these filings occurred in the last three years.

To be sure, the Great Recession was a big factor in these bankruptcies, but it wasn’t the smoking gun. The fiscal distress plaguing dozens if not hundreds of municipalities nationwide are hinged to past sins, and today their finance managers are desperately trying to set them on a straight and fiscally responsible path.

13Oct_Cities_StocktonTake Stockton, which city manager Bob Deis calls “a cautionary tale.” Brimming with property-tax revenues in the early 2000s, the city issued millions of dollars in bonds to build a marina and the 12,000-seat Stockton Arena. The booming stock market bolstered city pension funds, giving it the confidence to provide high-paying salaries and free health care for life to city workers. (One month on the job as a courthouse janitor and free health insurance was guaranteed for life — to the spouse, too.) Money flowed into multiple projects to rebuild the downtown core and spruce up the riverfront.

Then the recession rained on the parade, and Stockton was back in the mud. Deis and other Stockton leaders did their best to forestall bankruptcy, until there was nowhere else to turn. “It was the only thing left we could do,” he concedes. “We had cut services radically, to the point where any more cuts would have been dangerous, affecting public safety.”

That’s how bad things are for many municipalities — trim one more cop off the force and it’s the Wild West. For cities like Detroit, with its $18 billion in debt, the fiscal fissures are too deep to patch. Half the population is gone in a generation, their tax dollars in some other municipality’s coffers.

U.S. cities, counties and states can learn volumes from what went wrong in places like Stockton and Detroit. Chief among the lessons is the need for municipal finance leaders — CFOs, controllers and comptrollers — to stand up and be counted. “It takes a CFO to say, ‘Wait a second. Let’s get an actuary to cost these things out and see where we’re going before we dive in,’” says Deis.

His message to other cities in trouble? “Do an honest inventory, admit mistakes were made and fix them now.”

3 thoughts on “Cities on the Brink

  1. I was the city manager in 2008 that recommended BK for Vallejo. We had no choice; the city ran out of money to pay for union contracts. The city labor unions were stupid and they could not comprehend the math involved in operating a city.

    Basically, the math goes something like this: The fire union charged their members $175.00 month x 12 months/year x 100 fire fighters x 2 ( election cycle every 2 years) = $410,000. Police union charged $125 per month x 12 months/year x 145 cops x 2 years (election cycle once every two years) = $435,000. Together these two unions bought their elected Council members every 2 years since they financed the local elections by the tune of $$845,000 for every election. No one could compete with the fund raising. They controlled the City Council, their own contracts and the rest of the city too. Hence, their contracts were not sustainable and bankruptcy was the result. The Fire and Police union cooked their own “petard” as the saying goes.

  2. A couple of comments related to the County of San Bernardino: the County did not borrow $37M to help solve its budget problem, it actually prepaid $37M in debt using one-time funds to generate ongoing savings to help bring the budget in line. Second, the County is moving away from cafeteria style benefit plans, which are pensionable in our system and thus cost substantially more.

    These types of actions, combined with cooperation from employee bargaining groups and an elected Board willing to make difficult financial decisions in a timely manner have allowed the County to continue to adopt structurally balanced budgets throughout the economic downturn.

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