Friday, June 7, 2013

Will Fresno Follow Stockton Into Bankruptcy? I Don't Think So

The City of Fresno's budget for next year assumes millions of dollars in new franchise fees from trash privatization, but these fees depend on the outcome of last week's Measure Z vote.  The Measure Z vote is very close, provisional ballots are still being counted, and the outcome won't be known until next week.

Some people have been saying that Fresno is the next Stockton, and that failure of the trash privatization measure would push it towards a bankruptcy filing.  While I am not nearly as familiar with Fresno's budget as Stockton, I don't see a Fresno bankruptcy.  There are plenty of similarities between the two cities, but Fresno's financial situation doesn't appear quite as dire as Stockton, the level of services has not been cut as low as Stockton, and there appears to be resolve in City leadership to avoid bankruptcy.

There are some obvious similarities between the two cities.  Both are in the Central Valley and have similar economic statistics, although Stockton is closer to the bay area and had a bigger housing boom and bust.  Both cities have a lot of debt for similar things like ballparks and mammoth pension bonds, but Fresno issued its pension bonds a long time ago rather than Stockton who dumped its bond revenue into CalPers at the top of the market and took a much larger financial loss on the deal.  Fresno administers its own pension plan, whereas Stockton is in CalPers, and Fresno has somewhat lower pension costs (although they use different actuarial assumptions than CalPers so it is impossible to do an apples to apples comparison of pension liabilities) and does not offer the kind of unfunded retiree healthcare benefit that Stockton did prior to its bankruptcy filing.  Here are some additional high level comparison numbers I have gathered from the two Cities' budgets and other sources (there is a bit of rounding here for simplicity).

Population: 500,000
General Fund Revenue: $275 mil, about $550 per capita
Police: 717 (about 1.43 per 1,000 residents)
2012 Murders: 51

Population: 300,000
General Fund Revenue: $160 mil, about $533 per capita
Police: 330 (about 1.1 per 1,000 residents)
2012 Murders: 71

Since both cities are spending about half of their general fund on police, the police staffing and murder statistics provide some background on the level of services.  Both cities have cut police, but Stockton's cuts have been much deeper and had a larger impact on crime.  Stockton's murder rate in the year of its bankruptcy filing spiked to double the Fresno rate as police staffing dropped to arguably the lowest level of any major American city.  Fresno police staffing is not high, but they would have to lay off about 150 more cops to get to Stockton's level, and no one is contemplating those kind of cuts regardless of the outcome of the trash privatization measure.  Stockton had more excessive employee compensation and retiree benefits, and was unable to gain significant enough restructuring without bankruptcy protection.

Through the 1990s and 2000s, Fresno was similar to Stockton but did not quite go to the same extremes.  Its costs of delivering services, primarily driven by personnel costs, remained lower than Stockton.  I am not sure if this is due to better management or its greater distance from the bay area and smaller economic boom reduced cost pressure.  I was a little surprised to see Fresno had slightly more general fund revenue per capita, they might receive more sales tax since they are a regional service center and more isolated from alternative shopping opportunities.    

Fresno certainly has severe financial problems, and that City may well have to endure one more round of painful budget cuts to fully stabilize its budget.  I expect it will go that route rather than a bankruptcy filing. 

However, it should be noted that an escalating public safety emergency is what made additional cuts unacceptable in Stockton and made the bankruptcy filing inevitable.  Similarly, the bankruptcy outlook for Fresno could change if conditions, both financial and non-financial, change.

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