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Refugee Historian Flees California For Better Prospects in Tajikistan: Thoughts on Stockton’s Bankruptcy

July 5, 2012

It’s the 5th of July, but with the weather around Southern California looking suspiciously English for this time of year – overcast skies, hints of drizzle, the sense that you might have to put on a jacket – it’s time for me to move on to my next stop.

This coming weekend marks the beginning of a big (and hopefully penultimate) dissertation research trip that will take me to decidedly warmer locales. I’ll begin with a stay of about two months in Dushanbe, Tajikistan, where I intend to work in archives and libraries, conduct interviews with Tajiks who workers as advisers and translators in Afghanistan during the 1980s, and hopefully take some Persian courses, too, to continue making progress in that language.

Dushanbe, Tajikistan: the next stop on the road for your humble narrator

Following that, it’s off to Tashkent, Uzbekistan, for more of the same (although replace Persian/Tajik courses with Uzbek), followed by a two-and-a-half month sojourn in Moscow to … work in archives, interview former development workers who were active in Afghanistan during the 1980s, and, all the while, continue to refine and re-draft existing chapters of the dissertation to bring it somewhere closer to completion. There’s a lot of work, but I’m excited.

There’s plenty to be nervous about in departing for Central Asia, but a part of me will be glad once the wheels pick up on my Los Angeles – Frankfurt flight this Saturday. California’s a great place, and I’m delighted to see that so many of my friends from the East Coast have begun to re-settle to San Francisco and Los Angeles, but look beyond the technological utopianism of Palo Alto and Mountain View and you’ll find a state whose cities and counties are in deep doo-doo.

One of the latest pieces of news has been the bankruptcy of Stockton, California, a city of close to 300,000 people about 85 miles east of San Francisco, about two-thirds of the way up California’s Central Valley. The bankruptcy, which the city’s leaders declared last Thursday, is the largest in American history and has significance reaching far beyond California, as many of the symptoms that led to Stockton’s current fiscal crisis are shared by other American cities.

Stockton, CA – home to all of these fabulous attractions, as well as the largest municipal bankruptcy in US history

recent report from California Common Sense, a California goes into more technical depth on the causes of the fiscal unraveling. The report’s authors identify three core causes to Stockton’s present woes. First, the nationwide expansion of credit and the subsequent housing boom turned Stockton into a residential boomtown in the early 2000s. Median home prices soared from $180,000 to almost $400,000 from 2002 to 2006. That meant huge rises in revenues from property taxes, the surge in local construction jobs, utility user’s taxes, and housing permit fees. When those sources of revenue cratered (median home prices in Stockton are now around $130,000), the city’s budget was decimated.

Second, these secular fiscal problems were exacerbated by excessively optimistic spending and contracts made during the brief boom period. The city’s managers dreamed of “the historic Philomathean building’s rehabilitation, the downtown marina and waterfront’s development, and the Hotel Stockton’s renovation,” and locked in long-term employment agreements with the city’s police union and the City Employees Association in 2007 and 2008, respectively. But these deals quickly looked untenable after the 2007-2009 collapse in revenues.

That led to the third problem, an ill-timed bond offering designed to reduce the City’s pension obligations. Already by 2007, city leaders concerned with mounting pension costs issued a so-called pension obligation bond. Pension obligation bonds are a common financial move for cities with unfunded pension liabilities. Instead of doing nothing while facing an upcoming $158 million in unfunded future pension costs, Stockton sold $125 million in bonds to investors at a five-and-a-half percent interest rate, expecting to  earn enough to pay back investors as well as some portion of the unfunded future pension costs thanks to an (expected) seven-and-a-half return from the market. There was only one problem. CalPERS, the California pension fund that invested the bond proceeds for Stockton, was highly leveraged in real estate and CDOs, turning the city’s $125 million investment into $93 million in the space of two and a half years. Not only was the city still on the hook for the $158 million in unfunded pensions; now it also had somehow to pay back the $125 million in bonds (plus another $23 million in interest to bondholders).

While those of us who work in the stratified world of Bay Area tech companies, consultancies, and big-time law firms are likely to be somewhat insulated from such news, the Stockton bankruptcy has highlighted a couple of important lessons for the Californians – transplants or natives – unfortunate enough to live outside of this bubble.

First, if you or any of your family members are counting on “guaranteed” returns from your state employees’ or municipal employees’ pension plan, proceed with extreme caution. The generous cost of living increases in your pension are likely to have depended on optimistic predictions of seven percent annual returns from the market and a growing tax base. Cities like Stockton and states like California could count on those dynamics until 2008-2009, but once they were exposed to be illusions, so, too, turned out to be the promises made to public servants.

Working for the local police department no longer offers the ironclad benefits of yore

Second, though, setting aside those fortunate enough to get vaulted into the world of bobos in paradise, I notice sometimes how young Americans of my generation, facing what they see as dismal career prospects, fantasize about joining what they call “the protected class” – shorthand for public unions, especially police and fire. Young people discouraged by the bleak employment picture and increasingly aware of the limited gains that a Master’s in ___ Studies, or a JD from most law schools, will give them, think that if only they, too, could join the Stockton Police or Fire Department and retire at 35 to a pension paying 90 percent of their maximum working salary, all would well. Indeed, this worked well enough for many in our parents’ or grandparents’ generation.

But as the case of Stockton shows, even public employees’ unions with political clout are impotent faced with budget shortfalls of tens of millions of dollars, and the rules and regulation of bankruptcy proceedings in some states (including California) means that in ensuing budget arbitration public unions can only respond to budget amendment proposals, not propose any of their own budgetary solutions. That means they’re especially likely to feel the pain of cuts. This doesn’t get around the big issue of there not being enough jobs, of course. But it still seems to me that young Americans, rather than thinking about how to retire at age 35, should instead be planning ahead for a working life that is not only longer, but also hopefully more fulfilling than that of their parents or grandparents.

Goodbye for now, Los Angeles

Does that mean that getting on to the next flight to Tajikistan is the solution for every young Californian? Alas, probably not. But the case of Stockton should be instructive for any young, ambitious, would-be politicos with their eyes on California as a case of what not to do. I won’t be back to the fair climes of the Golden State until after the upcoming frigid Moscow winter, but here’s hoping that by then, local and state politicians will have begun to re-think how to avoid making our state the home of more Stockton-style municipal crises.

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