Stockton on verge of declaring bankruptcy ECONOMY City on verge of becoming largest in U.S. to declare bankruptcy

Rhondda Nunes,(left) a neighborhood watch captain patrols the American Legion Park with friend Jessica "Kitty" Walter, in Stockton, Ca. on Thursday Mar. 1, 2012. The City of Stockton, Ca. could be the largest city in the country to file for bankruptcy after the city council voted Tuesday night to begin mediations with service unions and creditors as required by state law. less Rhondda Nunes,(left) a neighborhood watch captain patrols the American Legion Park with friend Jessica "Kitty" Walter, in Stockton, Ca. on Thursday Mar. 1, 2012. The City of Stockton, Ca. could be the largest ... more Photo: Michael Macor, SFC Photo: Michael Macor, SFC Image 1 of / 9 Caption Close Stockton on verge of declaring bankruptcy 1 / 9 Back to Gallery

Stockton --

Black-and-white photos of Stockton in its heyday - of handsome buildings and bustling streets - flash on the flat-screen television at Henry's Miracle Mile Hair Styling in the city's historic shopping district.

Customers also get a sobering dose of color images showing empty, boarded up stores and restaurants that left downtown long ago.

Stockton is on the verge of becoming the largest city in the United States to declare bankruptcy, and on a recent weekday the talk inside the old school barber shop centered on the financial havoc at City Hall that threatens the often derided city of nearly 300,000 residents.

Stockton native and barber Terrance Fields said the city's decline is evident not only in the pictures, but also just outside on the street.

"We haven't seen the meter maid in two weeks," Fields said as another barber trimmed hair on a silver-headed customer.

Cars parked out front sit all day, taking spots that could be used by customers, and no city workers patrol and ticket the vehicles, he said.

But that's a relatively minor problem for Stockton. A combination of bad financial practices, bad decisions and bad luck has pushed the city into a hole so deep, bankruptcy may be the only way out. Last week, the City Council voted to begin an unprecedented restructuring of its mounting debt.

A local minister began the meeting with a prayer, and Mayor Ann Johnston remarked, "We definitely need the help of the Lord to go through these proceedings."

Stockton has been hit particularly hard by the collapse of the housing market, ranking at or near the top of the list of the nation's cities with the highest foreclosure rates. The city is also reeling from generous employee benefits approved years ago, decades of flawed accounting practices that hid some of the problems and the extensive debt taken on in the past decade to build gleaming civic structures.

City leaders hope to avoid bankruptcy by persuading creditors to forgive some of the city's debt.

It's tough medicine for a city that has serious social problems. In addition to the foreclosures, Stockton has one of the nation's highest rates of violent crime and an unemployment rate of nearly 20 percent. Last year, Stockton was named America's most miserable city by Forbes magazine, a ranking that makes many people here bristle.

"I'm still a fan of Stockton. I love it," said Fields. But, he added, "We really need to figure out why Stockton can't survive."

What went wrong

The steps leading to the entrance of City Hall are worn. Carved into the stone high on the Renaissance Revival-style building is this: "Let that which the fathers have builded inspire their sons to civic patriotism."

Inside, in a wood-paneled conference room, City Manager Bob Deis tries to explain why Stockton is in this mess. He's been doing a lot of explaining lately, fielding questions from reporters throughout the state and country who want to know what went so wrong in Stockton.

Deis took the job in 2010 after serving as manager for Sonoma County. He was stunned by what he found as he dug into the city's finances.

Not unlike many cities, Stockton saw tax revenue plummet with the housing crisis, property values tank and construction of new homes come to a near standstill. That caused a wave of joblessness. The city's general fund was $200 million four years ago. Today, it is $160 million.

What alarmed Deis was the depth of the city's huge unfunded guarantee for health care for retired city employees, caused in part by a very generous policy that promises city workers lifetime coverage for themselves and a spouse after just one month of employment. Union leaders say the benefits are not excessive.

But Deis likens the benefit to a Ponzi scheme. He estimates that the health care obligations amount to $417 million over the next 30 years and said the city will spend more on health benefits for retired workers than for current employees next year.

Revenue overstated

Added to that is woeful accounting practices by former city officials that overstated Stockton's revenue by millions of dollars. Finally, as the city was flush with money during the housing boom, officials took out more than $300 million in bonds to build large civic projects, including a new arena and baseball stadium next to McLeod Lake downtown.

Deis speaks about the finances in a matter-of-fact way, but he gets visibly frustrated when people question whether the city's financial problems are truly that bad. Before he joined Stockton, leaders had spent $48 million to purchase a sparkling eight-story building that formerly housed a bank. It is supposed to be the new City Hall, but now there's no money to pay for the move.

Some have suggested selling the properties, but like many homeowners in Stockton, the city owes more on the buildings than they are worth. Deis suggested, and the council agreed, to skip payments on three bonds until June. Rating agencies have downgraded Stockton to junk bond status.

"Using hindsight," Deis said, "the city should have limited its dreams and built less."

Targeted by union

Deis' actions have been controversial and earned him the ire of the police officers union. The union bought a house next door to Deis, which the city manager has said was an attempt to intimidate him. The union also bought space on billboards in the city that proclaimed, "Welcome to the second most dangerous city in California" and "Stop laying off cops" next to the phone number for Deis' office.

The city faces a budget deficit next year that will be at least $20 million but could rise as high as $38 million.

What city leaders seek to do now is to gather the largest debt holders, including retirees, and attempt to negotiate a reduction in debt that would be large enough to wipe out next year's deficit. That process will take three to four months, and, if it's unsuccessful, the only option is filing bankruptcy and turning over the city's management to the courts.Services already have been slashed, including the elimination of 99 police officer positions, Deis said, adding that any further reductions would greatly endanger public safety in a city long known for its high crime rate.

Rhondda Nunes, a musician who lives in a neighborhood near downtown, sees the problem daily as captain of her neighborhood watch.Homes in the neighborhood are regularly hit by burglars, some multiple times.

"I can see the Police Department just does not have the time to be the eyes and ears," Nunes said. She said police only respond to active emergencies. If a home is hit but the burglar is already gone, "Good luck having the police respond that day," she said, adding that often people are just told to fill out a report online.

Parks not maintained

Nunes has also started patrolling the park near her house, where a young man was killed a few years ago. The park is situated around a small lake and walking there recently Nunes pointed out round spaces of mulch every few yards.

The trees in the park get infested with mistletoe, but the city does not have the resources to do regular maintenance. "So they're clear cutting now," she said.

Whatever happens next, it is unlikely that Stockton will again experience the kind of boom that started in 2002 and lasted five years.Imran Poladi, a Realtor in Stockton and former president of the Central Valley Association of Realtors, said proximity to the Bay Area caused big demand for homes in Stockton, as they often cost as little as half as much and people saw the commute as worth it for the money they saved.

As prices escalated, people living and working in the Central Valley were given large loans that they later could not afford, he said. When the market imploded, not only did those people lose their homes, but many who worked in the Bay Area also walked away from homes that lost significant value.

Poladi was a victim of the market, too, and had to walk away from his home. He got sick with cancer and said the bank wouldn't assist him in modifying the loan on the house he bought for $370,000. He ended up declaring bankruptcy, and the bank sold the house for $116,000, but he said he's not leaving Stockton.

"This really is a great city," he said.