On May 30, Stockton City Council announced they’d be looking into filing bankruptcy after Wells Fargo repossessed the new City Hall they had just built. Stockton, California, is just one of a long list of municipalities nationwide that is considering bankruptcy because of high public union wages and pensions.
What’s interesting is employee unions have been part of the fighting pointing the finger back at the city management for incompetence. Recently, the Stockton firefighters union sent a list of 10 things the city did that they accused wasted $116 million. Included in that list was the $48 million spent on a new City Hall. What the union doesn’t share is $417 million liability of the healthcare benefit system. This does not even include the liability and generous salaries and retirement pension program.
The new City Hall cost Stockton and $35 million to purchase and then was never allowed to move in due to Wells Fargo seizing the building for not making payments. On June 5, the City Council is expected to meet to discuss a contingency plan if mediation between the city and creditors fails. Currently, the city is protected under the new AB 506 state law that requires municipalities to go into mediation prior to filing for bankruptcy. The state assembly created this bill in preparation for the financial problems of municipalities statewide. The idea behind it was to force a payment plan with creditors in an attempt to avoid a bankruptcy filing.
Over the last couple months, the mediation between the bondholders and the unions has been going on and the outcome will determine whether or not the city ends up in bankruptcy. It was recently reported that Wall Street lawyers are taking a hard line in the mediation was Stockton. The city entered into mediation on March 27 and is required to continue on until June 25 in an attempt to avoid filing for bankruptcy. Now the city is required to find its pay-as-you-go retiree healthcare system at a cost of $9 million annually. Stockton will be required to come up with $18 million by next year to continue this pay-as-you-go system.
With the markets being unstable and municipalities employee contracts weighing heavily on city’s finances, it’s expected to see many cities filing for bankruptcy over the next couple years.