Stockton’s Rose-Colored Sunglasses
The California city faces a harsh reckoning for its unrealistic fiscal assumptions.

A shuttered business on Main Street in Stockton, Calif.


Yesterday, the city of Stockton, Calif. — population 292,000 — became the largest city in the United States ever to file for bankruptcy. After 90 days of forced mediation between the city and its largest creditors failed, Stockton had run out of options. The members of its town council, all Democrats, voted Tuesday, 6–1, to pursue Chapter 9. The town now has officially filed the papers.

Last year, Stockton made Forbes’s list of “Most Miserable Cities” because of its staggering levels of unemployment (near 20 percent) and crime (it’s the tenth-most-dangerous city in terms of violent crime). And over the last three years, Stockton saw 25 percent of its police officers, 30 percent of its firefighting staff, and 43 percent of its other public employees let go as the city scrambled to cut $90 million from its budget.

But for the residents of Stockton, the harshest days may still lie ahead. Even after gutting public safety, Stockton finds itself with its cash reserves entirely depleted, a $26 million fiscal deficit, and $830 million in unfunded retirement liabilities for public workers.

How did Stockton find itself in such fiscal disorder? While some of the factors behind its downfall are unique, others are troublingly common: Increasingly, municipalities are dreaming big but planning small.

According to Douglas Johnson of Claremont McKenna College’s Rose Institute, Stockton has been “clobbered by all three” of the major factors hitting California cities: 1) a vicious housing crash, 2) overly generous compensation for city employees, and 3) a huge bump in retiree pensions (which in Stockton were renegotiated in 2000). There is a common thread among all three troubles: the blindly optimistic belief that the good times would continue indefinitely.

For Stockton, the biggest of these problems is its deal with public employees. For current employees, Stockton guarantees a wage increase of 2.5 to 7 percent every year, regardless of how the city’s general fund performs. Stockton also provides a rather generous set of post-employment benefits, including lifetime free medical insurance to all retirees and spouses, which has added over $1.3 billion to the city’s long-term debt.

The city’s pension program is another albatross. On the recommendation of the California Public Employees Retirement System (CalPERS), the organization that manages most of California’s pension funds, Stockton increased pension benefits nearly 50 percent in 2000 and all but stopped making direct payments into the fund. CalPERS assured municipalities that high returns on existing investments would cover the additional benefits.

CalPERS — then under the watchful eye of Governor Gray Davis — assigned the interest rates, made the projections, and drew up the recommendations that eventually sunk Stockton. In typical Californian fiscal fashion, there was a catch: For Davis’s investment estimates to work, the Dow Jones Industrials would have needed to reach 25,000 by 2009 (it didn’t reach half that) and nearly 13,000,000 come 2050. CalPERS’s approximations extrapolated from the height of the Internet boom, conveniently validating luxurious public-sector contracts.

This dynamic, says Stockton city manager Bob Deis, amounted to a “nasty partnership” where both parties were “negligent.” “If the city staff was doing their homework, they would have asked what [CalPERS’s] assumptions were,” Deis says. “There were lots of hidden items in the labor contracts that were not common. . . . The city staff did not understand the various assumptions that CalPERS used.”