Bankruptcy Lesson: Stockton Is About Stockton

Stockton is a peculiar place, at once both inland and a port, both city and exurban community for people who work in Sacramento and the Bay Area. It's a weird mix of different kinds of places, and there's nothing quite like it.

But to listen to recent commentary, it's being portrayed as a quintessential California city.

That misinformation comes from those who want to use Stockton's bankruptcy to draw broad conclusions about cities in California and around the country. The main narrative is that they are being bankrupted by overspending, or by pensions and retiree benefits for employees.

There's more than a grain of truth in that -- unsustainable pensions and retiree health benefits are a big problem in California, and in many other places -- but let's put a hold on the rhetoric.

Most cities aren't going bankrupt, and most won't.

Stockton is a rare case, and probably will remain so. That's because it's getting hit both by urban problems, by the economic problems of the Central Valley, and by the housing and foreclosure crisis of exurban communities.

This is also the moment for a corrective about pensions. As the former deputy state treasurer Mark Paul (who is my California Crackup co-author) often notes, it's wrong to say that one problem for Stockton and other cities is about pensions.

The real problem is two problems: compensation and governance.

Pensions are a form of compensation -- deferred compensation. And too many places in California and elsewhere have paid public employees more than they can afford -- both in today's salaries and in deferred compensation (which is what pensions and retiree benefits really are).

The public employees who have been most overpaid in California, compared to other states, are law enforcement workers. California's system of governance makes this problem worse because it encourages local elected officials to defer compensation and other costs into the future.

Because our system doesn't permit local officials to set tax rates, they don't have to come up with the money to fund their promises. Local officials are thus spenders, and they are incentivized to spend as much as they possibly can. An easy way to do that, when the state and federal governments are providing less money, is by making future spending commitments; pensions and retiree benefits are forms of that.

The solution to this crisis is not to blow up attempts to provide people with retirement security, but to reform governance, by returning to local officials the responsibility of setting tax rates and raising the money to fund their promises.

The other crucial thing is simple: stop paying public employees, particularly the law enforcement ones, more than we can afford.

Lead Prop Zero blogger Joe Mathews is California editor at Zocalo Public Square, a fellow at Arizona State University’s Center for Social Cohesion, and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (University of California, 2010).

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