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.
Take 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.”