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Is Stockton California’s Canary in the Coal Mine?

With the bankruptcy of the city of Stockton—the largest city to face such a filing—the wheels are beginning to fall off municipalities in the once proud Golden State. What this means for area business leaders is: Hold on to your wallet.

Bondholders are nervous because the city of 300,000, an agricultural center about 80 miles east of San Francisco, skipped payments on bonds earlier this year and plans to continue that pattern while it reorganizes its debts in bankruptcy. The question remains whether Sacramento can see the writing on the wall and put its fiscal house in order or will it ignore such signs and ultimately succumb like Greece or Spain when bondholders say enough is enough? Bob Deis, Stockton’s council chief, who signed Stockton’s bankruptcy filing on June 28, was quoted as saying that it was the city’s decision to provide free healthcare to retirees as a “Ponzi scheme” that eventually left the city with a whopping $417 million liability.

Like other cities in California, Stockton chose to offer many public safety workers the same benefits as those mandated by a state law for highway patrol officers. The change, according to a report filed by Jim Christie in the Huffington Post, allowed police officers to retire at 50 with pensions based on 3 percent of final pay for each year in service, up from 2 percent before. City employees in other unions also received more generous pensions with eligibility to retire at age 55 – with 2 percent of final pay multiplied by the number of years of service. This is in contrast to the vast majority of private-sector workers who cannot receive Social Security payments before they are at least 62.

To what extent do the problems of a city like Stockton foreshadow other problems around the state, or for that matter in municipalities elsewhere? Officials in San Jose, CA intimate that their city may also be on the brink. California has an unemployment rate of 10.9 percent, the highest of all states save Nevada and Rhode Island. It has a third of all welfare recipients in the country. As our annual rankings indicated the state is also one of the highest taxed areas of the country. It’s boom and bust tax system makes the state overly reliant on its wealthiest citizens, who when subjected to punitive rates can readily flee the state. Even Governor Jerry Brown now admits that depending on the rich to pay the state’s bills causes “volatility” in revenue collections

Recently Chief Executive spoke with Wisconsin governor Scott Walker who survived a recall election and instituted numerous reforms to the Badger state’s pension system as well as spending and tax cuts to improve its competitiveness. Wisconsin leapt to 20th place from 24th in our Best/Worst States rankings in 2012, something that Walker eagerly points out to reporters when interviewed recently on CNBC.

We asked whether in light of Wisconsin’s experience what advice he would offer California Governor Jerry Brown. “California is at the edge of the precipice,” Walker said, “ The pension issue Wisconsin faced is something every state will have to deal with soon and my advice is to confront it now. The public pension problem will only get worse; and voters –democrats, independents as well as republicans–want to see their political leaders solve this. The political consequences are not as dire as some leaders think—as long as they really solve it.”

Nonetheless, Sacramento continues spending money it doesn’t have and is unlikely to see given the state’s faltering growth. The LA Times was quick to defend Stockton as a victim of “bad luck.” The editorial chided outsiders for reading too much into the city’s chapter 9 filing. Yet what is one to make of the fact that Governor Brown continues to bless Sacramento’s spending habit and even supports a tax increase on California upper income earners in November?

Read: Is Stockton the Start of a Rash of Municipal Bankruptcies

Read: Stockton Bankruptcy The Result Of 15-Year Spending Binge

Read: Misunderstanding Stockton

Read: Best/Worst States from May/June 2012

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