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Stockton’s Unlearned Lessons

eye on the news

Stockton’s Unlearned Lessons

The troubled California city could straighten out its finances, but its leaders don’t seem to want to. October 8, 2014
Economy, finance, and budgets
California

The Bureau of Labor Statistics, which tracks monthly unemployment in 372 metropolitan areas, reported that Stockton, California had the nation’s eighth-highest jobless rate at the end of August. More than 10 percent of those looking for work in the struggling Central Valley city couldn’t find it. This is nothing new. Stockton has been coping with unemployment rates 50 percent to 75 percent above the national average for more than a decade. Based on that long history of joblessness, you’d think that qualified local residents would be ready to snap up government jobs with starting salaries of $60,000, plus health benefits, a pension, and yearly pay increases. Apparently not: according to the city’s elected officials, if Stockton is forced to reduce its generous and costly retirement plan as part of its exit from bankruptcy, the city will see a “mass exodus” of workers and won’t be able to fill crucial positions in its police and fire departments.

Bankruptcy judge Christopher Klein ruled last week that the unusual legal protections enjoyed by California pensions, which make it virtually impossible to cut the costs of a pension plan in the Golden State, did not apply in bankruptcy court. Stockton city officials and lawyers were livid. They had planned a reorganization sharply cutting what some creditors receive while leaving the city’s gigantic annual pension bill untouched. One city creditor, Franklin Templeton Investments, which would receive as little as one penny on the dollar for its unsecured claims, has objected, arguing that it’s not fair that Stockton could ignore its huge retirement debt. Judge Klein essentially agreed, saying that there’s no reason the city couldn’t hack away at it, or even dump its expensive plan with the California Public Employees’ Retirement System and seek a cheaper alternative. “There are lots of permutations and combinations out there,” said Klein, explaining the various ways Stockton might save money by replacing its expensive pensions with something more affordable.

Stockton officials’ claims that they would face a personnel crisis if they cut pensions strain credulity. Salaries and benefits in California’s public sector are so generous that, even after bankruptcy, a government job should appeal to many Stockton residents. Based on a deal negotiated between the city and its police union after Stockton entered bankruptcy, the starting salary for a police officer is $4,970.39 per month, or $59,644 annually. That rises to $72,888 after five years. Firefighters start at $49,000 annually, a salary that rises to $60,000 in five years. The city’s median annual household income is less than $36,000. Stockton will also spend about $14,000 a year toward a family health-insurance plan for a new officer or firefighter. New officers enter a pension plan under which they can retire at 57, with 2.7 percent of final salary for every year served. So an officer with 30 years of service and a final salary of $75,000 would qualify for a pension of nearly $61,000.

Public service is apparently so tough in Stockton, however, that the city claims it must compete aggressively for a limited pool of new workers. Stockton’s former city manager justified not asking for significant changes to pensions because “we cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.” Some elite military units have lower washout rates.

Government-worker unions exploit this kind of thinking to demand higher wages and benefits, especially when neighboring municipalities boost their compensation. That creates an ever-upward spiral of wages as school districts, towns, and cities adopt the new wage levels, regardless of whether they can afford them. Stockton officials admit that their current woes are a product of this mindset. In 2012, the former city manager pointed out that for years, Stockton officials added benefits in line with those offered by other cities. “Nobody gave a thought to how it was eventually going to be paid for,” he said.

Stockton risks coming out of bankruptcy with a heavy compensation burden. Officials argue that city workers have sacrificed enough, largely because the city eliminated its program of providing free health-care coverage for all retirees. But that extremely expensive perk is rare in the private sector and disappearing in government. Meanwhile, however, pension contributions for public-safety workers now amount to 41 percent of payroll. That would put the total cost of salary, health benefits, and pensions at about $120,000 annually for a fifth-year officer. The good news, if you can call it that, is that the city projects that after several more pension increases in coming years, Stockton’s soaring retirement costs will “level off.” The bad news is that pension contributions already amount to $42 million annually in a city with a general-fund budget of just $185 million.

Stockton is heading down a path previously traveled by Vallejo, the Bay-area city that emerged from a three-year bankruptcy in late 2011 without cutting its pension debt. Vallejo tried to compensate for its still-high retirement costs with cuts elsewhere but is now struggling financially thanks to its soaring pension costs, including annual pension contributions for police officers that average about $50,000 per cop.

The long saga of Stockton’s decline dramatizes the inefficiency and illogic of union-dominated, monopolistic, government-labor markets. California laws and court rulings provided Stockton workers with extraordinary protections for some benefits, including one of the nation’s most generous pension plans. When Stockton couldn’t cut its labor costs fast enough, it engaged in destructive rounds of layoffs because, ironically, the one thing you can do when all else fails is fire people. City residents and laid-off city workers were the losers.

Now Stockton has a chance to reach more solid financial footing thanks to Judge Klein’s ruling and a painful two-year sojourn through bankruptcy. But it’s not clear that city officials have learned their fiscal lessons.

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