Jeffrey Michael, a finance professor at the Stockton-based University of the Pacific, agrees. "The bond salesmen charm financial staff," Michael said, "and then the financial staff pitches these things as a miracle drug to the city council."
"Go back and look at the sales pitch from Lehman Brothers," Michael said. "The pitch amounts to this: You can issue these bonds or you can cut your pension benefits — and you don't want to do that. Borrow it at a low rate and gamble it in the market. If it pays off, you don't have to make the tough choice."
While Michael thinks agrees that the core problem is Stockton's failure to wrestle with its employee costs, he does wonder if a default by Stockton might actually help correct the bond market. "If Stockton did not pay back their bonds and it caused the whole market for pension bonds to dry up, in my opinion, that would be a good thing," he said. In short, the risky bonds should be uninsurable, unaffordable, and thus unused.
Are they serious?
Some see the city is less a victim than a perpetrator.
A scathing June 2012 report by Barclays Municipal Research argued that Stockton could dig out if it were willing to make hard choices with employees, but it has chosen to abandon its bond holders instead.
"In our view, this bankruptcy is about fiscal mismanagement and unwillingness to pay shown by elected officials," the Barclays report stated, arguing that the largest and fastest growing part of the mess are employee costs, and that these have been barely addressed in the "Pendency Plan," which lays out Stockton's plan to emerge from bankruptcy.
Payroll is 74 percent of Stockton's expenses, Barclays notes, with debt service just 14 percent But the city's plan calls for half the savings to be taken from debtors, which the report characterizes not just as unfair but mathematically undoable.
While Stockton's defenders point to declining employee headcount — especially in public safety — Barclays argues that by cutting only lower-paid staff, Stockton reduced headcount but raised payroll.
With each reduction, the report states, "the average salary climbs dramatically, as low-cost employees are eliminated in favor of more senior, high-cost employees."
Stockton's median household income is now under $50,000. The median city employee, who earned $70,620 in 2006, suddenly earned $102,260 in 2010. From 2006 to 2010, Barclays notes, the city total payroll increased by 5 percent while the number of employees plummeted by 28 percent.
Contrast Vallejo. Like Stockton, a working class city on the San Franciso Bay-area periphery, Vallejo also saw explosive growth in the past two decades, and then ran into trouble. Vallejo went bankrupt in 2008.
There the similarities end. Vallejo used the bankruptcy to aggressively re-engineer its personnel costs, according to a widely cited California Common Sense report. Vallejo cut its police and fire forces, negotiated lower wages and benefits, and emerged with its bond obligations largely intact.
Stockton's plan shows the city "does not plan to address the fundamental cause of the crisis: employment expenses," Barclays argued.
Barclays doubts the courts will approve Stockton's bankruptcy plan, predicting that "eventually the city will be forced either by logic or judicial ruling to change its treatment of labor costs."
Most agree that the city is mainly to blame. Some also point to pixie dust brokers at Lehman Brothers. Michael does not absolve those who insured the bonds. "They encouraged the city's risky fiscal behavior," he said, "and profited from it."
Some critics point to CalPERS itself, which helped drive the city to the bonds by charging a heady 7.75 percent on the pension shortfall — thereby encouraging the city to take bigger risks to catch up.
CalPERS, critics say, burned Stockton twice with these aggressive assumptions.
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