There have been days where readers in frustration about Davis’ fiscal situation have suggested that Davis simply declare bankruptcy and start over. However, the experience of Stockton suggests that a simple answer is elusive and that bankruptcy is wrought with its own perils and difficulties.
Teague Paterson, a Sacramento attorney, is no dispassionate bystander as he filed a brief in the Stockton case on behalf of the Peace Officers Research Association of California (PORAC). He noted “the consequences for a municipality [declaring bankruptcy] are 10 times as dangerous [as a private citizen].”
“Bankrupt cities,” he notes, “face soaring crime rates, shrinking property sales, and the reduction or elimination of basic public services. It’s is not a decision that an elected official or city manager would willingly make unless there were no other options, as the decision by a bankruptcy judge presiding over Stockton’s bankruptcy makes clear.”
While we can imagine that Mr. Paterson is not unbiased on this matter, we believe he is largely correct that “Judge Christopher Klein’s ruling Thursday to approve Stockton’s bankruptcy plan confirms that the situation in Stockton will have little impact over the larger national debate on public pensions. Municipalities will not be filing for bankruptcy in waves in efforts to jettison pension debt. “
“For the very few severely distressed cities that may consider bankruptcy, the question will not be whether they can reduce pensions, but whether they should,” he writes. “In Stockton, the answer to that question was clear to all with a stake in Stockton’s future – and after two years of litigation that cost tens of millions of taxpayer dollars, the bankruptcy judge agreed.”
He adds, “Throughout the bankruptcy process, the people of Stockton have been through hell and back. Judge Klein said that the length and cost of the bankruptcy process, and the likelihood of protracted litigation, will give any cash-strapped city considerable pause before considering a bankruptcy filing.”
It was not long ago, when Judge Klein’s ruling came out, that it appeared there might be a path forward to reduce pension obligations in the future in cases of bankruptcy. Previously, judges had ruled pensions to be vested rights, where cities could not reduce them even prospectively.
As CalPERS (California Public Employees’ Retirement System) notes, “The California Supreme Court long ago established that a promise of a pension made by a public employer to its employees is a promise the employer must keep. In other words, public employers in California are legally required to honor promises to current and former employees regardless of how much money they have set aside for that purpose.”
But Judge Klein’s ruling changed that – he was willing to declare that pension obligations are simply debts that could be trimmed. He went further and declared that the city of Stockton has the right to reduce pension payments and even sever ties with the powerful pension fund.
“The verbal ruling from U.S. Bankruptcy Judge Christopher Klein was groundbreaking,” the Bee wrote a month ago. “It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred.”
That they decided not to go that way demonstrates the problem, going forward, that cities face.
The city of Davis does not face the type of debt that Stockton did and therefore bankruptcy has not really been an option. While Davis was slow to implement reforms to pensions, health care benefits, and even capping of salaries in the early days of the recession, Davis escaped without massive debt.
Right now it is plagued by a large amount of deferred maintenance on roads, parks, city buildings and other infrastructure. Perhaps its biggest problem is the sluggish growth in sales tax revenue resulting from its underdeveloped economy.
The path forward for Davis, however, is relatively straightforward.
First, it must continue to hold the line on, if not make further reductions to, employee compensation. The sales tax measure has given Davis the ability in the short-term to balance its budget. The sales tax offsets the increases to employee compensation costs plus it gives Davis about $3.9 million now in ongoing revenue to use for roads.
However, city staff and consultants have recommended the city bond to create about $25 million over two years that it can use to reduce the road maintenance backlog. Because of the double-whammy of road costs – asphalt inflation and road deterioration – the increased costs of road repair is actually greater than debt servicing costs.
In order to bond, the city will need a revenue stream to bond against and that will likely take the form of a parcel tax. There has been some debate as to the size of the needed parcel tax and what the city should pay for with that tax. Some have argued the city should just pay for roads, sidewalks and bike paths. Others like the mayor, want the city to address pool needs, parks and other infrastructure.
The third plank of this strategy is growing the economy. Former City Manager Steve Pinkerton in 2013 argued that the city did not have a spending problem anymore, it had a revenue problem. The city has an underdeveloped retail base that has led to a slow recovery after years of recession.
Going forward, the city is looking to generate new revenue through a Hotel Conference Center located on Richards Blvd, and the city is looking to develop innovation parks on Nishi, Mace Ranch Innovation Center and the Davis Innovation Center.
The city is looking at a 20-year build out of more than 7 million square feet of business space on the latter two sites. With one-time construction fees and anticipated property and sales tax enhancements, the city will be much better positioned economically after the build out.
But that is a long-term strategy. In the short term, the city is going to have to survive on a tight budget, which means holding the line on employee compensation, allowing turnover to gradually reduce both pension and health care costs, and passing temporary tax measures to bridge the gap.
It may not bring quick relief, but, over time, it will build a stronger and more sustainable system without the need for bankruptcy.
—David M. Greenwald reporting