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Risk and ambition: Stockton's bankruptcy a morality tale for cities around the nation

Published: Saturday, Sept. 22 2012 4:00 p.m. MDT

Sworn police staffing in Stockton, Calif. dropped from 1.52 per 1,000 residents in 2005 to 1.16 today.

Ben Margot, Associated Press

This is part one in a two-part series.

Read part two: Pixie dust: How Stockton gambled its way from bad to worse.

STOCKTON, Calif. — The marina is beautiful, sparkling and new. So are the baseball park and the hockey arena, home to the Stockton Ports and the Stockton Thunder. Across the street is a stunning refurbished historic theater. The facilities glisten in the evening August sunshine, while teenagers do backflips off a pier and children fish for bass.

A stone's throw away is Stockton's City Hall. Above the entrance is an "All-American City" banner, reflecting faded glory from awards won in 1999 and 2004, but beneath the banner the lamp post foundations are badly cracked. It's one of many clues around the city that something has gone badly awry here.

Wells Fargo repossessed an eight-story office building meant to be a new city hall earlier this summer. The city had defaulted on its loans. The bank also seized underperforming parking garages, which the city built when boom times seemed here to stay.

At a city council meeting in that fading city hall on that warm August evening, the word "bankruptcy" is never mentioned but lies heavy in the air.

The council approves a renegotiated pensions deal with the fire unions. The private management company that oversees the shiny new venues reports on its progress filling seats. A 53-year-old retired police officer unloads his frustration about losing his promised free medical care.

The aftermath of Stockton's mismanagement will haunt the city's residents for years to come. Essential services are already being short-changed to pay debts and employee pensions.

Stockton's path to bankruptcy is an object lesson in how exuberance, naiveté and false hopes can supplant prudence. It's a lesson that cities, counties and states around the nation are rapidly learning.

Stockon is easily the largest U.S. city ever to file for bankruptcy. The next closest, San Bernardino in southern California, also filed this summer. But it may not hold the record for long. Former Los Angeles mayor Richard Riordan told FOX Business Network in August that he expects his city to be insolvent within two years.

It's an infection that is sweeping not just the nation but the world. As Mediterranean countries totter toward bankruptcy, U.S. states like California and Illinois, and a good handful of American cities from Stockton, Calif. to Scranton, Penn. are on the same path.

And unlike Europe, where profligate Greece can eventually be severed from frugal Germany, California is permanently tied to AAA-rated states like Utah, which will feel the economic tsunami when the financial earthquake hits.

Boom times

"It was a perfect storm," said Stockton Mayor Ann Johnston in her office as she prepared for an afternoon city council meeting earlier this summer. The storm is a popular metaphor to describe Stockton's disastrous mix of ambitious public building, employee benefit overreach and the sudden collapse of its tax base, as property taxes evaporated after home values fell and foreclosures skyrocketed.

But Johnston does not view the city as a victim. She knows choices were made and that imprudence made the storm worse than it needed to be.

In the late 1990s and into the first years of the new century, Stockton boomed. As the pricey Bay Area pushed housing demand outward, home prices here jumped to a $400,000 median.

Building starts surged, property tax revenue skyrocketed, and the city got a gleam in its eye. At the peak, said Vice Mayor Kathy Miller earlier that afternoon, "they were pulling 3,000 housing permits a year. Money was just flowing all over the place."

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