The Stockton Bust

Stockton, California, had seen a flurry of new home projects right up till the mortgage market crash. But, boy, did that come to a screeching halt. The crash led to foreclosures, which led to lower revenues from property taxes for the city. And though the city tried some spending cuts, they haven’t been enough. The Stockton City Council just voted, six to one, to seek federal bankruptcy protection.

Reasons for the bankruptcy, however, are not confined to reduced revenues. Add “soaring pension costs” and “contractual obligations” to the list of disaster factors.

And it’s pensions and medical insurance that make up the elephant’s share of “contractually obligated” must-​pays. We’ll see if official bankruptcy will allow the city to get out from under that mess. The Chapter 9 plan includes dropping medical benefits for currently fully-​covered retirees.

Who’s to blame? Politicians who negotiate really cushy deals for their (our) employees. The contracts obligate future taxpayers to pay out huge pensions for future retirees, rather than being funded (through insurance and investment) at the time of salary disbursement. The problem is that politicians love to make promises others must keep. Specifically, in this case, they contract defined benefit pensions not defined contribution pensions.

It makes no sense to do this, of course. It encourages irresponsibility, and is (to use a buzzword that should be used often against its usual purveyors) unsustainable. As proven by the Stockton bankruptcy.

Stockton is, so far, the largest American city to go belly up. We can expect further such busts, since the cause of Stockton’s problems — under-​funded pensions coupled with full-​coverage, gold-​plated, lifelong health insurance for government retirees — remain endemic throughout the country.

This is Common Sense. I’m Paul Jacob.