What Are the Implications of Stockton for State & Local Leaders?

November 3, 2014

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Taking Stock in Stockton: Are there lessons learned for other state and local leaders? This morning, as we await Thursday’s decision on Detroit by U.S. Bankruptcy Judge Steven Rhodes, we wanted to look back at last week’s decision in Stockton—and what its broader implications are for state and local leaders across the country. Unlike other kinds of corporate bankruptcies, the purpose of a municipal bankruptcy is, after all, to ensure there is no interruption of public services—especially those affecting health and public safety. But municipal bankruptcy is a microcosm of our intergovernmental system—it involves every level of government in our country. Most fascinating too are some significant differences in the way states have fashioned the rules through which those cities may have access to federal protection and the U.S. Bankruptcy courts: some, for instance, such as Michigan and Rhode Island, empower the respective governors to appoint receivers (R.I.) or Emergency Managers (Michigan)―in effect imposing a state takeover, preempting all municipal authority. But in Alabama and California, it is municipal elected officials who are responsible for putting together their respective plans of debt adjustment and blueprints for their post-bankruptcy municipal futures—even as they continue to bear the responsibility for the day-to-day governance and oversight of their respective municipal corporations—and participate, both winning and losing—in municipal elections. So, in the wake of Stockton’s successful emergence last Thursday, we wanted to take a look at Stockton’s prospects for its future—and what this all might mean to state and local leaders across the nation. To do this, we were very fortunate to benefit from the views of an original architect of Stockton’s plan, Bob Deis, its former City Manager (please see below).

Recovery. In putting together its blueprint and plan of debt adjustment, Stockton did get some concessions as part of its collective bargaining agreements, including on employee salaries and the elimination of most retiree health benefits, but still has long-term unfunded liabilities that need to be addressed. The key now is to focus on its recovery. Under its federally approved plan, Stockton will emerge with lower employee costs per capita, a higher tax base, and less outstanding debt to pay. Michael Fitzgerald, a columnist for the Stockton Record, Friday night quoted U.S. Bankruptcy Judge Christopher Klein’s epitaph for the case: “In the cold light of day, I imagine that the industry overall will take a look at the cost of Chapter 9 cases and be sobered by the results and expenses in this case….It probably should be an object lesson in why the Chapter 9 process is not lightly to be entered into.” And the expenses—for any city or county contemplating filing for federal bankruptcy protection, are significant—a cool $14 million, made up of $10 million for attorneys, millions to consultants, $627,000 for the special election over Measure A, and a sales and use tax hike for the citizens. On the other side of the ledger, the higher taxes came even as the city lost a quarter of its workforce—and their respective services. Instead, the city now faces years’ of debts to pay off—with the debt to Ambac Assurance alone to be on the books until 2052.  Nevertheless, Mr. Fitzgerald predicted “labor-friendly state lawmakers will soon craft new hoops to make it harder for municipalities to reach Chapter 9. Such laws should be opposed.” Finally, in a key massage, he wrote: “Stockton’s bankruptcy is fraught with almost too many lessons to recount. Cities, don’t spend more than you make (duh). Be leery of bond debt. Don’t rely on rosy fiscal projections; bad times are just around the corner. Don’t allow City Hall to be hijacked by public employee unions or any other interest group at the expense of the institution’s broad public mission. And perhaps most importantly, fill your City Hall with whip-smart, seasoned, highly qualified public servants. Not populists who whip up the unwitting on Facebook. Not anti-tax ideologues. Not labor lapdogs. That is Stockton’s hard-earned wisdom. Wisdom you, reader, can take to the polls next week.”

From our special guest correspondent Stockton, Bob Deis, who has served at the local level for 35 years, fixing difficult financial issues in cities and counties in three states, California, Oregon, and Washington, serving during that brief period as a City Manager and County Administrator, managing organizations ranging from 200 to 5,000 employees. Bob recently retired as the city manager of Stockton, where he had inherited an insolvent city of 300,000 that was chaotic and in distress from operational, budget, and governance perspectives. In 3.5 years, he installed a new management team and created a new high performing organizational culture, worked with its elected leaders to try and put the city on a path to solvency by taking the severe but necessary step of seeking bankruptcy protection, restructured and eliminated massive short and long term obligations, and pass a unique revenue measure. He also oversaw the creation and implementation of a unique approach to a problem that has plagued Stockton for years, the Marshall Plan on Crime. Bob is now a Special Advisor to the national consulting firm Management Partners, helping distressed cities develop and implement transformational plans for recovery:

The question that I am often asked about Stockton is, “what does the future hold for that city?” given they just received approval for their Plan of Adjustment, their bankruptcy exit plan.

After investing 3 and a half years in a non-stop roller coaster ride, turning that organization inside-out while making sure the checks didn’t bounce, I can say with confidence the future looks brighter for Stockton. The reason why I am upbeat is because we took great pains to address the core of Stockton’s challenges and not just balance the books. I believe the last humbling act of filing for protection under Chapter 9 for many cities is just that, the last act on a long slow trip of missteps, negligence, gradual loss of good governance principles, and acceptance of mediocrity. These factors contribute to the ultimate “last” act and have to be addressed along with financial solvency.

The 12-step Alcoholics Anonymous model, one of the most successful models for personal change, provided the inspiration for Stockton’s recovery plan, including:

* Admit you have a problem

* Conduct a fearless inventory of yourself

* Are your mistakes 5 or 100% of the problem? (hint: it is never 0%)

* Make amends or fix

* Admit it when you were wrong

* The truth will set you free!

After all, individuals with strengths and weaknesses just like you and I make decisions good or bad. It is when “group think” kicks in and the bar gets lowered slowly over time is when cities get into trouble. There are current and former bankrupt cities that still haven’t been able to conduct that “fearless inventory” or “admit there was a problem”. What is the chance they will change bad habits after exiting bankruptcy? The roads to perdition and redemption start and end with the governing body and administration.

Unlike in states that have emergency managers or receivers, democracy in Stockton stayed alive throughout our bankruptcy process. Thus, we had to both own and “make amends” for past mistakes and still comply with a myriad of state laws e.g. labor relations, open meeting laws, etc., and as City Manager, I had no special authority to speed things along. We fashioned a complex bankruptcy exit plan that required the City Council’s understanding and approval every step of the way. In others words, the Council is well aware of what caused the bankruptcy and what it took to fix things. They were not swept aside by the state or an appointed receiver. Furthermore, Stockton’s form of governance made it easier to stay the course for exiting bankruptcy, as we had a majority turnover on the Council and we hardly skipped a beat in negotiating and implementing our improvement plans. Our Charter invested responsibility in me, the City Manager with the authority and responsibility of creating and negotiating the plan of adjustment.

Stockton’s organizational culture and its entire new management team is now based on good governance, transparency, fully assessing long-term implications of financial decisions, sharing the truth with the Council about their agenda, refusing to be bullied by special interests and demonstrating the highest professional standards.

In order to pass muster with the bankruptcy judge, the City had to provide a reasonable plan that assures the City will eventually be service solvent i.e. provide adequate services in the long-term. We hired outside actuaries and consultants to vet our cost and revenue trends. We received authority by the voters to increase taxes. We refused to be paralyzed by bankruptcy and concurrently developed a multi-disciplinary approach to address an extraordinary problem that has challenged Stockton for years, the Marshall Plan on Crime.

I think the only thing that we cannot influence directly is the election of City Council members. And with term limits, this is the only potentially troublesome area where special interests, the ones that contributed to Stockton’s problems, will attempt to further their agenda again. However, the leaders of the community have also learned a difficult lesson, and are committed and engaged to ensure future elected officials further the good work that we have started in repairing the city of 300,000, Stockton, California.

Note: We appreciate and are grateful for your insights, comments, guest contributions, and perspectives.

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