In 2005, Stockton, Calif., unveiled a gleaming sports arena on its waterfront, part of a $145 million plan to draw people downtown. The 10,000-seat facility, a glass-walled symbol of the city’s battle against downtown blight, was part of a redevelopment boom that also saw the addition of a 5,000-seat minor league ballpark, a 650-space parking garage, a 66-slip marina, and the purchase of an eight-story City Hall. “This is the project that’s going to bring folks home, and it’s going to bring people from around the region to Stockton,” then-council member Leslie Martin said in 2004 when the waterfront revival was approved.
The building boom was financed with a series of bond issues starting in 2003 that helped boost Stockton’s debt load to $977 million. Today the new City Hall stands empty because the government can’t afford to move in, and Stockton is on the brink of financial collapse. At the end of February the city said it would default on $2 million in bond payments and begin negotiations with creditors, the first step under an untested state law restricting municipal bankruptcy. If the talks fail, Stockton (population 292,000) stands to become the largest U.S. city to seek bankruptcy protection. It would join Central Falls, R.I., which filed in August after failing to win union concessions, and Jefferson County, Ala., which in November became the biggest municipal bankruptcy (in dollar terms) in U.S. history, with $4.2 billion in debt.
Since the 1980s Stockton had struggled to draw people downtown as homicides, which hit a record 55 in 1992, emptied the streets and prompted stores to move to suburban malls. The record was surpassed last year when killings rose to 58. “Redeveloping downtown was a big political deal for the city,” says Dwane Milnes, Stockton’s city manager from 1991 to 2001. “Downtown was deteriorating, businesses had left.”
Then in the late 1990s, Stockton, about 80 miles east of San Francisco, came within the radar of Bay Area home buyers searching for affordable alternatives. Its population grew 20 percent in a decade. Tax revenue rose as homebuilding increased sharply. Taking on debt, the city poured funds into sprucing up the downtown area and developing the waterfront in an ambitious plan to spur economic activity. “Our leaders were dazzled by rosy projections and their desire to jump-start downtown revitalization projects,” says David Renison, president of the San Joaquin Taxpayer’s Association in Stockton. “We’re going to be paying the price for a long time.”
In March 2004 the council agreed to issue $37 million in bonds to fund a $114 million plan to develop the waterfront. While acknowledging the financial risks, the lawmakers said the plan would draw people—and millions in private investment—to downtown. Council members said they were satisfied the risks of the project, which eventually grew to $145 million, would be contained. Then-council member Richard Nickerson, the sole dissenting vote, expressed doubts and said he’d prefer to build the venues one at a time. “We’ve strained everything we’ve got to get to a place where we can finance this project,” he said during the meeting. “And if it doesn’t go perfect, if the state is in trouble, if the federal government is in trouble, if we in this city are in trouble, heaven help us.”
While the city borrowed for buildings, it also ran up compensation and retiree health liabilities it now can’t afford. In the 1990s city officials approved a benefit that allowed a worker employed for as little as a month to qualify for city-paid retirement health care for the employee and his or her spouse for life, City Manager Bob Deis says. “One has to assume that the fathers of Stockton thought they could borrow to create infrastructure, which in turn would attract more people,” says John Ellwood, a public policy professor at the University of California at Berkeley. “And that would lead to more building, which would lead to more revenue, which would lead to a richer, better community. All of this presumed that the value of real estate would go up and up.