Southland cities struggle to avoid joining Stockton in bankruptcy

STOCKTON — City managers in Southern California on Wednesday were casting a wary eye on Stockton, the latest city to head to bankruptcy court, but said they were working hard to avoid what one public policy analyst predicted would be a string of municipal failures.

Facing spiraling labor costs and debt, the Stockton City Council decided late Tuesday night to seek protection under the U.S. Bankruptcy Code and is expected to file with the court as early as Thursday. The council took additional action to reduce costs but still could not fill a $26-million budget deficit. It ordered a stop to bond payments, slashed employee health and retirement benefits and adopted a day-to-day survival budget.

“We’ve been battling employees, retirees — it’s horrible,” Vice Mayor Kathy Miller said of the vote that capped the months-long mediation process that failed to resolve issues among creditors, employees and the city. “They say we’re heartless brutes. We’re killers. They come in with their children and their grandmothers and their dogs. There are people in wheelchairs. The man with a brain tumor. It hurts.

“But what they don’t grasp is they are a relative small minority with really luxurious benefits that outstrips what the average person earns working full-time. Those other people stop us in the grocery stores and the coffee shops and say thank you.”

Stockton was the first city to follow a path laid out by legislators in AB 506, which requires mediation before a municipality can file for a reorganization of debt. It failed to divert the city of nearly 300,000 from choosing bankruptcy protection.

Other municipal leaders say they don’t like what they sense is coming out of the port city but insist their own financial stress does not come close to requiring the course taken by Stockton.

“We are in tremendous pain,” John Gross, the finance director of Long Beach, said Wednesday. “Our citizens are feeling the loss of services. But that’s a big difference from Stockton.”

Miguel Santana, Los Angeles’ chief administrative officer, sees Stockton as a lesson in what can happen if the city doesn’t continue making adjustments to match declining revenue. In a budget outlook prepared in April, Santana alluded to Stockton’s financial meltdown in urging the mayor and City Council to push for higher taxes and spending reductions over the next four years.

“Bankruptcy is what you do when you run out of options,” Santana said. “We still have a number of options before us. They are just hard.”

They include adopting a pension plan for new civilian hires that would set a higher retirement age, partnering with nonprofits to run the city’s zoo and cultural centers and seeking new taxes, Santana said.

Though Stockton’s troubles arose in part from ill-advised spending on waterfront redevelopment as the housing bubble burst and the recession hit, it also came from adoption of unsustainable labor contracts, according to the city. That’s a longer-term problem vexing the state and scores of cities and counties, analysts say.

In 2008, Vallejo filed its own Chapter 9 bankruptcy, spurred by labor contracts the city said it could no longer afford.

Vallejo has since cut down to a skeletal staff and won concessions from its unions on raises, vacation time and healthcare benefits for both current and retired employees.

Under the law, municipalities have the right to ask the bankruptcy court to determine whether labor agreements should be rejected as was done in the Vallejo case; three of four unions in Vallejo renegotiated their contracts.

“Basically, this can put the unions and the municipality back at the bargaining table,” said Karol Denniston, a veteran bankruptcy attorney based in San Francisco. “Usually, both sides decide not to fight and just figure it out.”

Bankruptcy attorneys say Chapter 9 filings also give the court wide latitude to cancel or cut back on promised pensions. But Vallejo city officials decided to keep pension agreements with current and former employees intact. City officials have said they didn’t want to end up in protracted litigation.

Joe Nation, a former Democratic legislator and a public policy analyst at Stanford University, said pension pacts are like an anchor around the neck of governments. The state and local governments can’t fully fix budget problems without changing generous packages handed out when times were good, he said.

It’s not enough to change terms for new employees, Nation said. Governments must also require workers to put in longer careers and contribute more to their plans, he said.

Vallejo’s $131-million unfunded pension liability has continued to grow, he noted, despite efforts at cost savings elsewhere in the city.

“The city is still there,” he said of Vallejo. “It just doesn’t provide much in the way of services anymore.”

Stockton faces $417 million in unfunded retiree health benefits passed in the 1990s. Cuts so far would affect about 1,000 retired employees, but the city nonetheless faces estimated payments of $9 million this year and $14 million in 2013.

Saillant reported from Los Angeles and Marcum reported from Stockton. Times staff writer Dan Weikel contributed to this report from Los Angeles.

catherine.saillant@latimes.com

diana.marcum@latimes.com