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Real Estate, Redevelopment Woes Caused Stockton, San Bernardino Bankruptcies

Morris Newman on
Jul 19, 2012

Despite the tumult caused by that the demise of redevelopment, the recent perils of the cities of San Bernardino and Stockton did not stem from redevelopment-related costs. If soaring pensions costs and operational expenses were the immediate cause of the bankruptcies, the underlying cause did not stem from overly ambitious redevelopment schemes but rather from the prolonged housing bust that has choked off revenue to the cities (and, not to mention, financially crippled many of their residents).

Stockton has already filed for Chapter 9 bankruptcy protection, while San Bernardino had scheduled a fiscal emergency vote for July 17 authorize the bankruptcy filing. A third city, Mammoth Lakes, also filed for Chapter 9, apparently to fend off a $43 million judgment owed to a developer, and appears unrelated to the problems in the larger cities.

A June 26 fiscal report from the City of San Bernardino sums up the problem: Costs "continue to outpace revenue due to increased operational expenses and significant rapid declines in property taxes revenues, as a result of a drop in property values and decline in sales tax revenue." That's a lot of causality in just one sentence.

In Stockton, the list of creditors in the Chapter 9 filing tells the story. The city owes nearly $272 million in pension costs, including $147 million in unfunded pension contributions to CalPers, the public employee pension system, and another $124.28 in pension bond payments to Wells Fargo. Redevelopment-related bonds represent at least $142.98 million, including $10.84 million owed to the state Department of Boating and Waterways for work done on the controversial Stockton marina, which some local residents have cited as an expensive luxury for a largely working class farm community.

Stockton took on much of the debt in the decade prior to the 2007 credit freeze, when home prices were growing and high-profile projects like the marina and a convention hotel seemed feasible. Currently, however, Stockton is a study in civic misery, with a 22% unemployment rate and one of the highest foreclosure levels in the state. The city has slashed its budget repeatedly, laying off nearly a third of its police force and fire fighters—a tough call in a city rife with gang warfare and the second highest murder rate in California.

The next big dates for the Stockton bankruptcy are July 20, when the city is scheduled to make public the key points of the mediation between the city and creditors mandated by state law, and August 23, the next court hearing scheduled in Sacramento.

In San Bernardino, the city's financial report, prepared in anticipation of the City Council vote to declare a state of fiscal emergency, offers some broad parallels to Stockton: falling revenues and looming pension obligations. In all, the city faces a $46 million shortfall in 2011-12. Property tax revenues alone have fallen $11.69 million from their peak of $30.5 million in 20-07-08. Unfortunately, the city seems to have been caught by surprise in part due to two years of inaccurate estimates by staff, according to the Los Angeles Times.

Sale of city owned real estate, including redevelopment assets, may provide marginal assistance, at best, according to the city's own report. Currently, the city and the successor agency own or participate in commercial real estate with a "book value" of about $300 million (roughly, what it was worth when purchased) with a current market value of $100 million. The city is entitled to 18% share of any sale, or $18 million. San Bernardino is considered a secondary or tertiary market by institutional investors, however, who are channeling their money into safe, income-producing properties in places like San Francisco and Silicon Valley.

Not coincidentally, on July 17, a task force co-chaired by former Fed Chairman Paul Volcker and Richard Ravitch reporting on the financial condition of California and five other states seems to draw similar conclusions: "While state revenues are gradually recovering from the drastic decline of the Great Recession, they are not growing sufficiently to keep pace with the spending required by Medicaid costs, pensions, and other responsibilities and obligations," says the report, adding: "This (decline) has resulted in persistent and growing structural deficits in many states which threaten their fiscal sustainability." The report identifies several "major fiscal threats," including Medicaid spending growth, underfunded retirement promises, "eroding, narrow and volatile" tax bases, impact of the federal deficit reduction, and "local government fiscal stress."

Beyond the dismal numbers in both Stockton, San Bernardino, and elsewhere throughout the state, the question remains whether the timing of the dissolution of redevelopment agencies was hurtful to California cities in the long run. In both cities, however, the proverbial camel's bank was broken with or without real estate liabilities.

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