Add Stockton, California (population 292,000) to the list of cities bankrupted because of bad management and over-generous public union wages and benefits.
The Stockton City Council announced Wednesday that they will look at bankruptcy contingency plans after Wells Fargo seized the new city hall building.
The city paid $35 million to buy the 8-story building, but was not able to move in because of its money problems, and recently stopped making debt payments all together. This is the fourth building that was repossessed by Wells Fargo; the bank seized three city parking garages for the same reason.
At the June 5 Stockton City Council meeting, members will look at a contingency plan if mediation between the city and creditors failed, city spokesperson Connie Cochran said. For the past two months, the city, under AB 506, has been in a mediation process with creditors to come up with a payment plan in order to avoid bankruptcy.
Incompetent City Management and Unions to Blame
The firefighters’ union put together a list of 10 wasteful things the city has done wrong totally about $116 million, including $48 million for the new city hall.
$417 Million Healthcare Liability
The union does not tell you that Stockton has a $417 million liability for its “pay-as-you go retiree health care system”
And that’s just healthcare. What about pensions and untenable salaries?
So who is more to blame here?
Mediation with bondholders and unions is now underway, the outcome of which will determine whether or not the city files for bankruptcy.
Recordnet reports Wealth of interest in Stockton mediation
Wall Street lawyers are likely taking the hardest line in mediation with Stockton, waiting for the closed-door talks to play out with their arms folded, but seated at the table.
“It’s one thing to be forced by a court to give up your rights,” said Matt Fabian, a bond analyst at Municipal Market Advisers in Connecticut. “It’s another thing to give them up willingly.”
Stockton entered mediation March 27, and it agreed with its creditors and labor groups to continue until June 25. Mediation is the last-ditch effort to avoid bankruptcy.
The conversation in mediation starts with Stockton’s general fund deficit of $26 million, a fourth multimillion dollar shortfall year. The city must chip away at that figure with an eye on restructuring its obligations and forecasted deficits for years to come.
These are Stockton’s major obligations next year, absent any concessions:
Bondholders will get $13 million, an amount that has increased 600 percent in four years. Payments have ballooned just like homeowners who took adjustable-rate mortgages;
Stockton must fund its pay-as-you go retiree health care system at $9 million annually, something City Manager Bob Deis has compared to a Ponzi scheme. To begin funding this $417 million liability, the city would have to put aside $18 million next year;
A few things are known about mediation. There are 18 parties involved, and they are represented by 100 attorneys and accountants combing Stockton’s finances.
They are the city’s labor groups, retired city employees, CalPERS, Wall Street investors, Wells Fargo Bank and insurers responsible for paying bond holders if and when Stockton defaults.
The best course of action for the city is to seek bankruptcy. The city is indeed clearly bankrupt so there is no point in delaying. Delays will only serve the bondholders at taxpayer expense.
In bankruptcy court, the city should win the right to unilaterally modify the pension and healthcare agreements made with public union workers as well as terminate all collective bargaining rights. 50% or even 75% haircuts on pension and healthcare plans may be necessary. So be it.
Bondholders must also take a hit. I suggest 100% on the new city hall (minus whatever it can recover from the seized building). Wells Fargo deserves to be punished for being stupid enough to lend Stockton money.
Inquirung minds should also consider City Council of North Las Vegas Unanimously Suspends Collectively Bargaining of Public Unions, Citing Emergency Statutes.
If Stockton files bankruptcy it will be the largest city in the US to seek Chapter 9 bankruptcy protection. Don’t worry, that record will fall soon enough. LA and Oakland cannot be that far behind.
Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List