San Bernardino, CA--Another Ponzi Scheme?

Cities are going bankrupt because they made promises they couldn't keep—will community associations be next?

            Vallejo, California declared bankruptcy in 2008. The city of Hercules defaulted on its bond debt repayments. In June, Stockton California filed for Chapter 9 bankruptcy. On July 10, 2012, the city council of the City of San Bernardino, California voted to file for bankruptcy. That's two major California cities seeking bankruptcy protection within the last 30 days. Other U.S. cities and counties have either declared Chapter 9  bankruptcy or are on the brink. Central Falls, R.I.; Harrisburg, Pa; Boise County, Idaho, and Jefferson County, Alabama all share that distinction.[2] Stockton may be the biggest city in the nation to declare bankruptcy.

            Each of these public entities has a unique reason for its financial problems. Base closings. Industry shutdowns. A gradual financial decline. But Stockton’s case is somewhat different and perhaps presages more accurately the fate of many other municipalities—they spent money they didn’t have and failed to determine if they ever would. 

          “The city's fiscal history "has eerie similarities to a Ponzi scheme," says Bob Deis, the city manager Stockton hired in 2010. Over the years, the city promised employees huge—and unfunded—salaries and benefits...”[3]

            Essentially, the Stockton City Council approved ever-higher salaries and pension benefits for public employees without the slightest idea of how these benefits would be funded.

            “Perched precariously atop this mountain of obligations are retiree health benefits. Stockton officials awarded these to city employees in a series of votes in the 1990s but made no effort to fund them, intending simply to pay costs out of their budget as workers retired…Stockton Mayor Ann Johnston voted for these expensive measures when she served on the city council. ‘We didn't have projections into the future what the costs might be…I learned that you don't make decisions without looking into the future’… ‘Nobody gave thought to how it was eventually going to be paid for,’ says Mr. Deis, the city manager. “[4]

               Why would public officials be so shortsighted? Part of the reason was political pressure from public employee unions--pressure that is being applied even today to prevent further job and salary cuts. But part of it is that is just too simple to satisfy present day political demands by borrowing funds from future generations--essentially kicking the funding debt down the road.