Posted:August 1, 2012
Bankrupt Cities? Don’t blame public employees
This opinion piece by Harold Meyerson was published July 25, 2012 in the Washington Post.
The reporting and commentary on the bankruptcies of California cities over the last month haven't been journalism's finest hour. From reading the voluminous accounts of the fiscal woes of Stockton and San Bernardino, you'd think that municipal unions and feckless city officials are primarily what led these cities down the path to fiscal ruin.
But you'd be wrong. What bankrupted Stockton and San Bernardino were the most severe housing busts in the nation. What bankrupted those two cities were banks peddling subprime mortgages to poorly paid workers.
That story has been missing from most accounts of the debacle, which instead focus on the preferred narrative of the right and center-right: that of fiscal irresponsibility and overpaid public employees. "Another city sinks in pension morass," the Orange County Register editorialized. The problem common to the cities, wrote Sacramento Bee columnist Dan Walters, is that "elected leaders and appointed managers succumbed to hubris and political pressure, particularly from their employee unions."
Even most of the straightforward reporting has emphasized the errors of city managers and the burdens of having to pay city workers and retirees.
But that narrative is "Hamlet" without the prince. Yes, some elected and appointed officials were indifferent or insensible to their city's fiscal plight. But lots of cities have negligent public officials, and even more have police officers and firefighters with those demonized defined-benefit pensions. What sets Stockton and San Bernardino apart is a far narrower set of circumstances: They were at the epicenters of the American housing bubble and the American housing bust.
San Bernardino is a working-class town in the Inland Empire exurbs of Los Angeles, just as Stockton is a working-class town in the Central Valley exurbs of San Francisco. In the first half of the last decade, those exurbs saw a wave of home construction and sales to distinctly nonaffluent buyers, whom banks enticed through subprime mortgages. And when the bubble burst, both cities experienced a record number of foreclosures and a sharp dip in employment, particularly in construction.
How bad was the bust? Of the 372 federally designated metropolitan areas in the United States, Stockton ranks first in foreclosures, while Riverside-San Bernardino-Ontario ranks third. Among the thousands of U.S. cities, San Bernardino proper ranks third in foreclosures, while Stockton ranks fifth. Ranking the May unemployment rates in those same 372 metropolitan areas, with the area with the lowest unemployment listed as No. 1, Stockton ranked 364th and San Bernardino 354th. Unemployment in the city of Stockton in May stood at 17.5%. In San Bernardino, it stood at 15.9%.
Nor were the jobs that area residents clung to anything to write home about. The largest employment cluster in the San Bernardino area is the warehouse complex in Ontario and Fontana, where goods from China are hauled from the L.A. harbor and reloaded onto other trucks that take them to the Wal-Marts, Targets and Home Depots of the Pacific Coast and the Mountain West. The only way most of the roughly 100,000 workers in these warehouses can get these jobs, however, is through temporary employment agencies, even if they've held the same job for years. They make a little more than minimum wage -- if that.
Like all California municipalities, Stockton and San Bernardino depend on tax revenues -- chief among them property taxes (recycled through Sacramento as a result of Proposition 13) and local sales taxes -- to fund city operations. Amounts accrued from property taxes were greatly diminished by Proposition 13's passage in 1978, but in cities with new construction and rising home values, such as these two, property taxes still provided a reliable stream of revenue until the foreclosure wave hit.
At that point, property values in both cities collapsed -- and property tax revenues with them.
According to Leslie Appleton-Young, the chief economist of the California Assn. of Realtors, the median home value in San Bernardino County dropped a mind-boggling 65.6% -- from an average of $350,290 at the peak in 2006 to an average of $120,410 at the trough in 2009. Values haven't risen much since. The city of San Bernardino's property tax revenues have declined by one-sixth since 2007-08. And with unemployment skyrocketing at the same time, retail sales -- never very robust in low-income communities -- plummeted as well, dragging down San Bernardino's sales tax revenues 14%.
It's these numbers, not political chicanery or wage-and-pension rigidity, real though they may have been, that set Stockton and San Bernardino apart and that best explain what happened to them. That means any assessment of blame for their predicaments has to expand from such usual suspects as greedy public employees to include banks that flooded these cities with subprime mortgages that were resold into the high-flying securities market. It should include the huge retail corporations that have devised supply chains that employ area residents at barely livable wages.
Conventional wisdom may blame the unions and the pols. The facts tell a different story.