Saturday, July 07, 2012

how stockton went broke



Reuters | * City manager: Retirees' healthcare "a Ponzi scheme"

* Police officers can retire at 50 years old with pension

* No early signs of alarm about city's fiscal mismanagement

* Stockton's fortunes linked to housing boom and bust

The man in charge of the biggest U.S. city ever to file for bankruptcy is clear about the root of the crisis.

It was a decision that gave firefighters full healthcare in retirement starting on Jan. 1, 1996, s aid Bob Deis, the city manager of Stockton, California.

At the time, the move seemed cheaper than giving pay raises s ought by unions, officials involved in the decision said. When other Stockton employees demanded the same healthcare deal in following years, the city agreed.

Deis, who signed Stockton's bankruptcy filing last Thursday, s lammed the decision to provide free healthcare to retirees as a "Ponzi scheme" that eventually left the city with a whopping $417 million liability.

Before the turn of the millennium, things looked very different in California.

The U.S. stock market was booming, bolstering Stockton's p ension funds. Real estate values were about to soar, too, bringing a flood of new tax revenue to the once quiet farming town of about 300,000 people - abo ut 85 miles east of San Fran c isco - in California's Central Valley.

THE TRADE-OFF

To counter demands for wage hikes from city workers in the 1990s, Stockton offered to extend their health insurance in retirement past age 65 - a benefit they embraced and assumed to be rock solid until the insolvent city's officials put it on the chopping block in a bankruptcy plan last week.

"It was a balancing act," said Dwane Milnes, Stockton's city manager at the time. "The unions wanted retiree medical ... We said if you want to continue your medical for current employees and retirees, you'll have to do it through wage containment."

Milnes, who represented Stockton's retirees in recent talks with City Hall, said the strategy was sound at the time.

"We were satisfied that based on a conservative view of the economy and based on the medical inflation rate we were experiencing in the 1990s, the city could adequately fund retiree medical."