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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

"Prices became unhinged from the income," adds Jeffrey Michael, a finance professor at the University of the Pacific in Stockton.

In 2003, when home values should have leveled off after the economy cooled, prices continued to skyrocket, Michael said. "That was when the worst loose mortgages kicked in, when subprime lending and no doc loans became common."

The city responded to the resulting property tax bubble by overpromising.

Pensions and wages spiraled, especially for police and fire units. Fire fighters got a contract requiring that their salaries be at least 5th on a list of 16 California cities.

Lucrative overtime benefits also raised eyebrows. In 2010, a police sergeant made headlines for placing fourth on the city's salary list, earning $220,000 on a base salary of just under $100,000.

To overpromising, they added overbuilding, as ambitious mayors and city managers pushed through a series of dubious building projects.

Redeveloping

On the edge of the San Francisco bay delta but still firmly within the fertile, hot central valley, Stockton is a working-class town that has long chafed in the shadow of its more glamorous Bay Area neighbors to the West.

Increasingly a commuter home for the Bay, Stockton is home to a large private university, and has long supported a symphony orchestra. A deep-water port plays a key role in California's agricultural exports, and lately has been exporting iron ore from Utah on its way to China. With a booming housing market beginning in the late 1990s, Stockton leaders thought it was time to upgrade the city.

Some of the early projects centered on the waterfront itself, including creating attractive piers and parks along the river, where drug dealers once roamed and a parking lot was sinking into the channel.

"We used redevelopment funds to clean up the brownfields, and laid the basis for private development. That was going along fine and we were able to afford all those things," Johnston said. "It went wrong when, in 2002 and 2003, the city decided things were going so well that they could issue bonds for other major projects."

Overbuilding

Stockton pushed for an arena complex, including a 10,000-seat hockey arena, a 5,000-seat baseball diamond and an attached hotel complex. When cost overruns drove up the cost, the city got creative. Johnston recalls the scene in when she was on the city council.

"The mayor was talking about wanting a ballpark on the waterfront. The city manager said, 'There is no money. We can't do this.' And the mayor said, 'Can't we take money from municipal utilities, can't we take it from community development?' 'No, it's not legal to do that,' the manager said," Johnston recalled.

"And so he was stymied," she said, "but he kept trying to figure out how he could do some of these projects."

Eventually, a new city council was elected and a new city manager hired. "The city manager got an opinion from some attorney over in Oakdale, who said, "Oh yeah, you can borrow from municipal utilities," Johnston said.

So to help build the arena, the city raided dedicated sewer and water funds, which were legally segregated and not available for building projects.

But the Oakdale lawyer was wrong. Several years, $145 million and one lawsuit later, the city agreed to pay back to the stolen funds. With interest, it will cost the city $1 million a year over 30 years to pay back the $10.9 million it raided for the arena complex.

Altogether, the new complex cost more than $135 million in bonds. Unlike the parking garages and the office building, both now repossessed, the city has held onto the arena complex and the theater — subsidizing annual operating losses as it struggles with the construction debt.

Overpromising

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