Tag Archives: San Antonio

One Canary, Two Canary …

Will Stockton Be the Biggest Municipal Bankruptcy Ever?

I mentioned yesterday, that Stockton is the biggest municipal bankruptcy in US history. I had my cart slightly ahead of my horse. They haven’t filed bankruptcy. Yet.

In recent years this inland port city of nearly 300,000 people has earned several distinctions, none of them good. Twice atop Forbes‘ list of America’s Most Miserable Cities … Second highest violent-crime rate in California … Second highest home-foreclosure rate of all major U.S. metro areas. Now, Stockton is on the verge of another dubious benchmark: bankruptcy. In its third straight year of fiscal emergency, the city faces a deficit of as high as $38 million on its $165 million general fund budget. As required by state law, the city council is in mediation with creditors and unions. If a deal is not reached in the coming weeks — and prospects are bleak — Stockton will become the largest municipality in U.S. history to go bust.

While Stockton has been down on its luck for a long time, many residents insist its fiscal crisis is a function of bad management during the flush years of the housing boom. Long an agricultural hub for Central Valley farms and situated about 80 miles (130 km) east of San Francisco, it went through a steady financial decline that saw its once thriving downtown hollowed out by poverty and crime. Scores of people decamped for the north of the city, or left altogether. Street gangs multiplied. Then, in the early 2000s, the housing boom drew developers back to the region in droves. Plush subdivisions went up overnight to attract families with easy credit who could not afford the Bay Area.

Prior to the housing boom, reckless spending on public-employee contracts put the city’s long-term health at risk, according to active city officials. As coffers started to fill up from the swelling tax base, the sweetheart deals got sweeter. If an employee worked for one month, for instance, they and their spouses were eligible for retiree health care for life, a policy that had the predictable effect of motivating people to quit working early. Today Stockton has 94 retirees with pensions of at least $100,000 a year, Reuters reported, amounting to twice the number of California towns its size. The city’s long-term health liabilities alone amount to more than $400 million.

Meanwhile, Stockton’s urban core was given a face-lift to seduce homeowners. Tens of millions of dollars were poured into building a marquee waterfront area comparable to San Antonio’s river walk, complete with a gleaming sports arena, theater complex, marina and walkway. A celebrity chef was invited to run a restaurant, rent free, on the first floor of the historic Stockton Hotel. When it came time to open, the city paid singer Neil Diamond $1 million to headline a kickoff concert. “Then,” says longtime resident Robert Weaver, 76, “the whole thing ground to a standstill.”

The housing bubble burst, followed by the Great Recession. City revenue streams dried up (plunging more than $50 million compared with prerecession years), slashing municipal services across the board, from public parking to bike police. The downtown quickly reverted to a no-man’s-land: waterfront entertainments were shuttered, the grand hotels given over to low-income and student housing. A fancy high-rise municipal complex that officials had paid $35 million for is now being rented out, leaving the city council to debate its woes in their old building, where a red, white and blue banner out front reads with fitting irony: “Stockton: An All America City.”

“Stockton did something very similar to what many American families did: the city overcommitted to long-term obligations that even under the best of times the city could not afford,” says Bob Deis, the city manager since mid-2010. “So if there was not a recession, the city would have been having the conversation we’re having in four or five years. But then the perfect storm happened.”

Nobody Asked.

“The problem is, nobody asked the question: ‘How do you fund it?’ And consequently there was no money set aside to fund those commitments,” Deis said. “It was an unsound decision and it has similarities to a Ponzi scheme.”

In the 2000s, as housing prices soared in San Francisco and Silicon Valley, buyers from San Jose to Oakland seeking affordable alternatives flocked to Stockton, where starter homes cost around $400,000. Single-family home construction, which had averaged 2,500 units a year from 1991 to 1997, tripled to 7,500 annually from 2003 to 2005, according to Robert Denk, senior economist at the Washington-based National Association of Home Builders.

The city’s population grew 20 percent in a decade, to 291,707 in 2010 from 243,771 in 2000, driven by a surge in Hispanics who identify themselves as Mexican, according to U.S. Census Bureau data. That ethnic group jumped 56 percent in the period, to 104,172 from 66,900, while the black population grew 30 percent and the Asian population rose 29 percent, Census figures show.

Boom Time.

“Money was just pouring into the city coffers for development fees and permits,” Miller said. “Property taxes were going through the roof. It was boom-time.”

“There was an unspoken policy that to keep the unions from complaining about the amount of money being spent on projects, the easiest way to do that was to continue sweetening their compensation packages,” Miller said.

Among those measures were automatic salary increases regardless of whether the city had the revenue to support them. The contract with the fire union required the city to compare its pay with that of 16 cities including Huntington Beach, Anaheim and Torrance. Stockton firefighters’ salaries were required to rank fifth-highest, according to the city’s May 2011 emergency declaration document.

$100,000 Pensions.

Stockton retirees also fared well. The 94 with pensions of more than $100,000 compares with 38 in Bakersfield, which has 347,000 residents, and 35 in Chula Vista, with a population of 244,000, according to data compiled from state pension records by the California Foundation for Fiscal Responsibility, a Citrus Heights-based group that advocates pension reform.

An epidemic of foreclosures reached Stockton in 2007, as the recession left thousands of homeowners unable to afford their mortgages. Home construction collapsed and housing prices plummeted.

Revenue dwindled to an estimated $161.8 million in fiscal 2012 from $203.1 million in fiscal 2009. The city fired 25 percent of its workforce.

In Stockton’s San Joaquin County, assessed property values tumbled almost 11 percent in fiscal 2010, followed by 3.9 percent in 2011 and 4 percent in the current year, according to the county’s website.

Drastic Decisions.

“In the beginning, when this whole economic bubble burst, everyone had the attitude, ‘We’ll just avoid making drastic decisions and in a year or two things will be back to normal,’” Miller said.

The base pay for a Stockton police officer can be as much as $76,860, while a sergeant’s can reach $90,836, according to data provided by the city. In 2010, 87 percent of police officers got additional pay that added 8.7 percent for a canine handler, 4.3 percent for SWAT and 5 percent in “longevity pay” at six years of service. All are included in the calculation of retirement benefits.

“We are now the fifth-lowest paid police organization in the county where we handle the majority of the calls,” said Kathryn Nance, a Stockton Police Officers’ Association board member.

By 2009, city officials began considering bankruptcy.

Bankruptcy Protection.

Fritchen, the council member, asked the city attorney’s office to lay out the pros and cons of bankruptcy protection at a budget committee meeting.

A year later, in May 2010, the city declared a fiscal emergency to deal with a $23 million deficit. The declaration allowed the city to make changes to existing labor contracts.

Crime escalated as the police force was reduced by about 27 percent to 324 sworn officers from 441, according to Pete Smith, a police spokesman. There were a record 58 homicides last year, most involving gang violence, Smith said.

“We’re losing our grip on some of the more troubled neighborhoods and don’t have the ability to police the city as proactively as we did,” Smith said.

In the spring of 2011, Deis met with about 15 police employees and budget officials to seek concessions from the union.

Breaking Our Contract.

“He said if we continue to fight on them breaking our contract, then he is going to push the reset button and go bankrupt and we will all lose,” said Steve Leonesio, president of the police union. The union is suing the city, challenging its authority to reduce benefits under the emergency declaration.

Last year, city officials uncovered bookkeeping errors requiring $15 million in budget cuts that “will have the effect of stripping Stockton’s cupboards bare,” Deis said.

The mistakes included double-counting of $500,000 in parking-ticket revenues and overstating the city’s available balance by an estimated $2.8 million.

On Feb. 24, Deis walked into a news conference at City Hall and announced that the errors and the recession represent “the knockout blow” for the city’s finances. He recommended the city invoke the state bankruptcy law.

“We see no viable alternative,” he said.

Given the city’s huge obligations and shrinking capacity to generate revenue, Deis says it’s critical for Stockton to “break itself from the boom-and-bust cycle.” With guidance from a team of urban-development experts from around the country, city leaders are pursuing a new plan to revitalize the downtown — this time with private money. “We’re investing a huge amount of resources to make this process work”, says Deis, praising the tenacity of the current city council in going after bloated labor contracts to find some fiscal breathing space. “But we’re not in control of it,” he adds.

Stockton is not an anomaly. I am certain that I will uncover countless stories similar to this one, if I were to search every day for the next city about to fail. It is almost as if City governance across this country woke up one day in 2012, four years after the fact and said, “Gosh, there seems to be a recession here. Did something happen while we weren’t paying attention?” Yes, something did. I remember having lunch with Robert Bobb, one of the best City Administrators I have ever met. Bobb said, “Oakland has a chance to become one of the premier cities in America, but I wouldn’t bet on it.” He cited the growing pension problems that has Oakland in its grasp today, and that lunch was in 2003. Jerry Brown’s biggest mistake as Mayor was firing Robert Bobb.

The only way out of this mess is for City Administrators to get out in front of this never-ending problem with ballot measures for tax increases to cover the pension costs, and with contract re-negotiations to try and lower the trajectory of growth in pension debt burden. The city employee’s unions must come to the table with more reasonable proposals to re-cast those agreements in the light of the realities of 2012, and be willing to accept the fact that the money to pay for them is simply not there. We can’t party like it’s 1999 anymore.


And, The Hits Just Keep On Coming!

Credit-Card Debts Got ‘Robo Signers,’ Too

And here we were, thinking the “robo signing” of foreclosure documents was just one further ugly chapter in the U.S. housing mess, helping to spur a $25 billion settlement over abusive practices. It turns out that at least one bank, JPMorgan Chase (JPM), resorted to so-called “robo signing” in an additional area: the collection of credit card debts.

American Banker‘s Jeff Horwitz has published the first story in a multi-part series today, examining credit-card collections at Chase. The story details how the bank encouraged “procedural shortcuts and used faulty account records in suing tens of thousands of delinquent credit card borrowers” and reports that the Office of the Comptroller of the Currency, the regulator that oversees federally chartered banks, is investigating the bank’s flawed practices.

When Chase and other banks sue customers who are delinquent in their debts, they must submit affidavits to the court, documenting how much the consumers owe. Horwitz’s reporting shows that in the rush to recoup losses, Chase’s paperwork regularly misstated the debts, with employees often signing court documents without having verified the claims. Chase will turn out to be the baddest bad guy in this group, when it is all said and done. You heard it first here, folks.

Chase declined to comment Tuesday on the American Banker story. In a statement, spokesman Paul Hartwick says that after mortgage documentation problems came to light, the bank reviewed its other lines of business and alerted regulators when it found “other procedural issues.” Says Hartwick: “We have since done a number of tests and found that in the overwhelming majority of cases, the amount collected from customers was correct.” HAHAHAHA.

The story says the problems came to a head when faulty computer systems clashed with the aggressive approach of Chase management. Uh, right. Blame it on the computers. It always works. Chase had several computer programs to track consumer payments and debts. They worked well independently, but didn’t properly talk to each other, often creating discrepancies in how much customers owed. At first, employees could reconcile the differences by hand, but when new management sought to speed up recoveries, employees were told to use shortcuts, the story says.

Outside law firms often represented Chase in court. It’s a high-volume business for the firms, which are paid in proportion to debts they recoup. The law firms didn’t have access to some of Chase’s computer systems to check the documentation and often rushed to file “slapdash work,” the story says. According to an internal document, the numbers used by law firms representing Chase disagreed with the bank’s internal records in almost 20 percent of the cases in one sampling. A whistle-blower lawsuit stated that customers usually owed less than what the bank represented.

When consumers wrote to Chase, their letters were often ignored or shredded. Nice. “Borrower correspondence sent to the San Antonio facility, such as bankruptcy notifications, address changes, and hardship requests, were being dropped on an unmanned desk (this is actually funny), according to a 2009 printout from Chase’s troubleshooting log,” Horwitz writes. The story is filled with details and documents.

The procedures not only dragged consumers into court with faulty records but also created financial consequences for Chase. In April 2011, the bank stopped filing consumer debt-collection lawsuits and closed down an in-house collections office (hmm) that had recouped “several billion dollars of legal judgments every year,” the story says. Without filing new cases, Chase limits its options to recoup legitimate debts it may be owed. It is not clear what the bank is doing to collect on those debts.

So, what happens next? Nothing. Kyle Bass is probably right. Buy gold bullion and a lot of guns.

OK. Here’s a Positive Banking Story.

In the Era of Greed, Meet America‘s Good Bank: USAA

Highly profitable while conservative with lending, and not publicly traded, the United Services Automobile Association is a model for the financial services industry

615 usaa bank desert building.jpg

It didn’t take a penny in federal bailout money. It grew throughout the financial crisis. It has consistently garnered top customer service rankings. And Fortune magazine just named it one of the 20 best companies to work for in America. Meet America’s good bank: USAA.

USAA is a San Antonio, Texas-based bank, insurance, and financial services company with 22,000 employees, serving 8 million current and former members of the military and their families. The company’s roots go back to 1922, when 25 army officers agreed to insure one another’s cars when no traditional companies would. Since then, USAA, or the United Services Automobile Association, has steadily grown.

By its very definition, USAA serves the middle class. It does business only with current and former members of the military and their families. Studies have shown that the U.S.’s all-volunteer military is dominated by members of the middle class, not the elite.

While other financial and insurance companies flirted with collapse, USAA’s net worth grew from $14.6 billion in 2008 to $19.3 billion in 2011. And it has continued lending money while other banks have tightened their loan operations despite billions in government funding to encourage liquidity. It has a free checking account, has been at the forefront of electronic banking, and reimburses up to $15 in other banks’ ATM fees. Its credit rates are 43 percent lower than the national average.

The firm’s structure is one of its most interesting attributes. Unlike nearly every other Fortune 500 company, USAA is not a corporation.  It is an inter-insurance exchange made up of the people who have taken out policies with the firm. As a group, they are insured by each other and simultaneously own the company’s assets. Instead of paying stockholders, USAA distributes its profits to its members. In 2010, it distributed $1.3 billion.

“USAA is not publicly traded,” Nicole Alley, a company spokesperson, said in an email. “And we take a conservative approach to managing our members’ money.”

The firm is not perfect. A long list of consumer complaints can be found here. Standard& Poor’s lowered their rating of USAA from AAA to AA+ last August but still rates the firm above its peers. And my colleague Felix Salmon correctly criticized USAA’s initial reaction to the Volcker rule, which could force the company to change its structure. It’s likely, though, that a simple restructuring of its own could avoid that.

The reason I’m focusing on USAA is because it represents a different idea about the purpose of companies. It’s also run by former military members, who the last time I checked weren’t considered European style socialists.

Howard Rosen, a Visiting Fellow at the Peterson Institute for International Economics in Washington, points out that the role society expects banks to fill has changed over the last few decades. For example, the share of bank lending devoted to mortgages doubled from 30 percent to 60 percent between 1980 and 2009, squeezing out consumer loans and other bank loans. Mortgage lending by commercial banks grew on average by 12 percent a year between 2001 and 2007 while bank lending for business purposes, i.e. not mortgages or consumer loans, grew on average by only 3.6 percent a year. Total commercial bank assets grew on average by 8.6 percent each year over the same period.

In the two years since the end of the recession, bank lending for mortgages and business loans have actually declined, despite a slight increase in bank assets.

“It used to be that we wanted banks to be good corporate citizens with strong ties to local communities,” Rosen says. “Now all we ask is that banks just do what they  were initially designed to do — provide capital to companies who want to invest in plant and equipment in order to create jobs — any jobs, anywhere in the United States.”

Stephen Green, the C.E.O. of the British bank HSBC, makes a related argument in his new book “Good Value: Reflections on Money, Morality and an Uncertain World.” Green is the only ordained minister who is also the chairman of a major global bank, one that dwarfs USAA and controls more than $2.5 trillion in assets worldwide.

As Stephen Fidler of The Wall Street Journal recently wrote, Green says that “finding real peace,” involves accepting three uncertainties: that the world is imperfect; that we can’t be sure of human progress; and that hope endures.

“As a matter of fact the ethics of the marketplace are almost by definition universal,” Green writes in his book. “Everyone knows about the importance of truth and honesty for a sustainable business.”

Green, the banker, is trying to decode what makes a business good. Perhaps he should look to USAA for advice. USAA isn’t a model for an entire economy. But it is an example of technical innovation and thinking outside the box. We desperately need more of that. And more good banks in any form as well