Bankrupt cities? Don't blame unions

Stockton and San Bernardino were brought down by the most
severe housing busts in the nation, and by banks peddling
subprime mortgages to poorly paid workers.


By Harold Meyerson
July 25, 2012

http://www.latimes.com/news/opinion/commentary/la-oe-
meyerson-city-bankruptcies-foreclosure-20120725,0,6443912.
story

The reporting and commentary on the bankruptcies of
California cities over the last month haven't been
journalism's finest hour. From reading the voluminous
accounts of the fiscal woes of Stockton and San
Bernardino, you'd think that municipal unions and feckless
city officials are primarily what led these cities down
the path to fiscal ruin.

But you'd be wrong. What bankrupted Stockton and San
Bernardino were the most severe housing busts in the
nation. What bankrupted those two cities were banks
peddling subprime mortgages to poorly paid workers.

That story has been missing from most accounts of the
debacle, which instead focus on the preferred narrative of
the right and center-right: that of fiscal
irresponsibility and overpaid public employees. "Another
city sinks in pension morass," the Orange County Register
editorialized. The problem common to the cities, wrote
Sacramento Bee columnist Dan Walters, is that "elected
leaders and appointed managers succumbed to hubris and
political pressure, particularly from their employee
unions."

Even most of the straightforward reporting has emphasized
the errors of city managers and the burdens of having to
pay city workers and retirees.

But that narrative is "Hamlet" without the prince. Yes,
some elected and appointed officials were indifferent or
insensible to their city's fiscal plight. But lots of
cities have negligent public officials, and even more have
police officers and firefighters with those demonized
defined-benefit pensions. What sets Stockton and San
Bernardino apart is a far narrower set of circumstances:
They were at the epicenters of the American housing bubble
and the American housing bust.

San Bernardino is a working-class town in the Inland
Empire exurbs of Los Angeles, just as Stockton is a
working-class town in the Central Valley exurbs of San
Francisco. In the first half of the last decade, those
exurbs saw a wave of home construction and sales to
distinctly nonaffluent buyers, whom banks enticed through
subprime mortgages. And when the bubble burst, both cities
experienced a record number of foreclosures and a sharp
dip in employment, particularly in construction.

How bad was the bust? Of the 372 federally designated
metropolitan areas in the United States, Stockton ranks
first in foreclosures, while Riverside-San
Bernardino-Ontario ranks third. Among the thousands of
U.S. cities, San Bernardino proper ranks third in
foreclosures, while Stockton ranks fifth. Ranking the May
unemployment rates in those same 372 metropolitan areas,
with the area with the lowest unemployment listed as No.
1, Stockton ranked 364th and San Bernardino 354th.
Unemployment in the city of Stockton in May stood at
17.5%. In San Bernardino, it stood at 15.9%.

Nor were the jobs that area residents clung to anything to
write home about. The largest employment cluster in the
San Bernardino area is the warehouse complex in Ontario
and Fontana, where goods from China are hauled from the
L.A. harbor and reloaded onto other trucks that take them
to the Wal-Marts, Targets and Home Depots of the Pacific
Coast and the Mountain West. The only way most of the
roughly 100,000 workers in these warehouses can get these
jobs, however, is through temporary employment agencies,
even if they've held the same job for years. They make a
little more than minimum wage -- if that.

Like all California municipalities, Stockton and San
Bernardino depend on tax revenues -- chief among them
property taxes (recycled through Sacramento as a result of
Proposition 13) and local sales taxes -- to fund city
operations. Amounts accrued from property taxes were
greatly diminished by Proposition 13's passage in 1978,
but in cities with new construction and rising home
values, such as these two, property taxes still provided a
reliable stream of revenue until the foreclosure wave hit.

At that point, property values in both cities collapsed --
and property tax revenues with them.

According to Leslie Appleton-Young, the chief economist of
the California Assn. of Realtors, the median home value in
San Bernardino County dropped a mind-boggling 65.6% --
from an average of $350,290 at the peak in 2006 to an
average of $120,410 at the trough in 2009. Values haven't
risen much since. The city of San Bernardino's property
tax revenues have declined by one-sixth since 2007-08. And
with unemployment skyrocketing at the same time, retail
sales -- never very robust in low-income communities --
plummeted as well, dragging down San Bernardino's sales
tax revenues 14%.

It's these numbers, not political chicanery or
wage-and-pension rigidity, real though they may have been,
that set Stockton and San Bernardino apart and that best
explain what happened to them. That means any assessment
of blame for their predicaments has to expand from such
usual suspects as greedy public employees to include banks
that flooded these cities with subprime mortgages that
were resold into the high-flying securities market. It
should include the huge retail corporations that have
devised supply chains that employ area residents at barely
livable wages.

Conventional wisdom may blame the unions and the pols. The
facts tell a different story.

Harold Meyerson is editor at large of the American
Prospect and an op-ed columnist for the Washington Post.

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