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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

As bad as the building binge was, the pension and employment compensation fiasco was worse.

"During the 1990s, we had a huge run up in benefits granted to our employees. People could retire earlier, and they could retire on a larger pension," said Vice Mayor Kathy Miller.

No small part of this, Miller said, was a bidding war that plagued police departments around the state, triggered partly by the California Highway Patrol.

In the 1990s, CHP unveiled unusually generous compensation and retirement packages, leading to an erosion of experienced officers from municipalities. To retain its officers, Stockton and other California cities tried to keep pace.

The biggest hit, Miller says, occurred when the city granted lifetime medical benefits to retirees. "Free. For them and a dependent. Forever. And at the same time, we were beefing up all of our pensions, which leads people to retire younger on larger pensions."

"It's easy to give away someone else's money," Miller said. "You get into this spiral. Every time you sit down with a bargaining unit, it starts all over again. 'Well, San Francisco and San Diego are offering their people 2.5 percent at 55 instead of 2 at 60.'"

But it was a house of cards. "We knew they weren't funding these commitments. They were robbing Peter to pay Paul," said David Macado, president of the Stockton firefighters union, which has a website laying out the bad decisions that bred the crisis.

When the money ran out, Macado said, the city "got personal," attacking the unions, laying off employees, and cutting benefits.

Angry cops

The bankruptcy has allowed the city to renegotiate employee contracts. The city has dropped the lifetime free medical coverage, and has asked employee unions to pay the employee share of pension contributions.

While the fire fighters have come to terms, the police union has still not reached a deal. The police have launched a public relations blitz, with billboards all over the city reminding citizens how much they do for them — and how dangerous their city is.

It's not a hard sell. Stockton had a record 58 homicides in 2011 and is on track to exceed that in 2012. There is something unnerving about turning a corner on a Stockton street and confronting a sign that says, "Welcome to the second most dangerous city in California" — sponsored by the police union.

But there is also something unnerving about Stockton losing its best officers to other cities. "They can write their ticket anywhere they want in California," Macado said. "We have guys with 15 to 20 years of experience leaving to finish their careers elsewhere."

Sworn police staffing dropped from 1.52 per 1,000 residents in 2005 to 1.16 today, the lowest ratio for any American city over 250,000 people, according to UOP's Jeffrey Michael.

Somehow, Stockton negotiated contracts that allowed police chiefs to hire and quickly retire with massive pensions. In the last nine years, four chiefs averaged just over two years each, retiring with an average of $192,000 a year pensions, according to Kathy Miller.

The most lucrative stint was Police Chief Tom Morris, who retired after eight months at $204,000 a year.

A black hole

While the debt from overbuilding hurts, most experts agree that employee benefits are the real killer.

Ninety-four retired Stockton employees earn more than $100,000 in pensions, according a Reuters report.

Nearly 96 percent of Stockton's general fund currently goes to four categories: public safety, debt service, pension funding and other post-employment benefits.

That compares to 72.6 percent for 118 cities of similar size, according to a study by Stephen Winterstein of Wilmington Trust Investment Advisors, and 76.7 percent in a smaller group of 27 California cities.

By 2006, with pension pressure torquing, Stockton was already off the map. Hard choices would have to be made. Or so it seemed. That was when Lehman Brothers came knocking with a painless solution.

In part two: Lehman Brothers offers a painless solution to the pension gap: a bond borrowed at 5.81 percent with hopes of earning 8 percent or more. The gamble fails badly, and Stockton heads for bankruptcy.

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

Email: eschulzke@desnews.com

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