Doug Eberhardt is president and CEO of the Bank of Stockton.

Viewpoints: Stockton's case may prove to be a model for other struggling cities

Published: Thursday, Mar. 28, 2013 - 12:00 am | Page 9A
Last Modified: Thursday, Mar. 28, 2013 - 7:01 am

The last few years have been hard on cities all across America, but in few places has this been more evident than in Stockton. The Central Valley municipality was battered by the recession, as the mortgage meltdown and financial crisis all but decimated the city's revenue stream. With looming debt obligations, the city was forced to take a long, hard look at its fiscal troubles. And what it saw was far from pretty.

Faced with insolvency, city leaders did the best thing they could do: Address the city's financial issues head-on. As early as 2009, a reform-minded City Council began to restructure Stockton's finances, revamp public services and reduce costs by cutting staff, freezing salaries and modifying its health and pension plans. These efforts were politically difficult, but necessary, and they helped trim more than $90 million from the city budget.

Among the unprecedented reforms implemented was cutting general fund staffing by 43 percent and public works by 62 percent; freezing or cutting city salaries between 9 percent and 23 percent; and reducing personnel costs through furloughs. The city modified its employee and retiree health and pension plans, which were a major source of its debt obligation, and required employees to pay annual retirement contributions to CalPERS.

Yet despite these drastic cost-cutting measures, the city soon realized that it needed to do more. And so Stockton's leadership took further action, initiating mediation with its biggest creditors as required by California Assembly Bill 506.

AB 506 requires that municipalities, prior to filing for Chapter 9 relief, undergo mediation with their creditors. While Stockton was not the first – or the only – California city to file for bankruptcy protection, it is one of the first to use the AB 506 process. Vallejo filed for bankruptcy protection before the passage of AB 506, and San Bernardino went straight to a bankruptcy filing without mediation under the law's emergency declaration exemption of AB 506.

But Stockton didn't just fulfill the requirements of AB 506 – it surpassed them. After the 60-day negotiation period was up, the city and most of its creditors agreed to an optional 30-day extension in order to try to avoid the bankruptcy filing.

As the Stockton general fund shrank from $203 million in the 2008-09 fiscal year to $173 million in 2010-11, the city reached out to the bondholders and attempted to renegotiate the debt. Just like homeowners refinance their homes or businesses rework vendor contracts, the city hoped to find common ground with the bondholders.

While many of the rank-and-file employee unions were willing to put something on the table to help forestall bankruptcy, not a single tentative agreement was reached with any of the banks or bond insurers during the pre-bankruptcy process. As a result, the negotiations achieved enough savings to close the projected budget gap of $26 million, but with several of the parties – in particular the bond trustees and insurers – unwilling to come to any agreements, it still wasn't enough.

Simply put, the city of Stockton spent more than three years trying to get its fiscal house in order before turning to bankruptcy as a last resort. Stockton's bankruptcy plan calls for permanent cuts to employee and retiree benefits, restructuring – rather than eliminating – its private debt obligations.

Bankruptcy is far from an ideal solution; it's difficult, it's time-consuming and it comes with a stigma that no city, corporation or individual wants to carry. But in Stockton's case, upholding a Chapter 9 filing is absolutely necessary and will enable Stockton to put the past behind it and move toward a brighter future.

Other communities should pay attention to what is going on in Stockton. With the economy still struggling, other cities will likely face similar challenges. So the question isn't if other cities will face economic challenges, the question is when. And when they do face challenges, they will look around to see what other cities have done. They should look to Stockton. And when they do, they will see a city that turned an obstacle into an opportunity and a community that is moving past a dark yesterday and building a better, brighter tomorrow.

Doug Eberhardt is president and CEO of the Bank of Stockton.

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