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California Prison Town Files for Bankruptcy

by John E. Dannenberg

The City of Stockton, California, which hosts two youth correctional facilities and is the site of current construction for a new $700-750 million prison hospital for the California Department of Corrections and Rehabilitation, filed for Chapter 9 bankruptcy protection on June 27, 2012. It is the largest U.S. city to ever file for bankruptcy.

Stockton suffered from financial mismanagement following boom times in the early 2000s, when the median home price soared from $110,000 to $400,000 and real estate tax revenues rose proportionately. From 2003 to 2009, Stockton borrowed to fund a new city hall, an events center and arena, housing projects, parking garages, a fire station, a police communications center and improvements for parks, streets and a marina.

During the current economic downturn, however, real estate prices have plummeted and Stockton’s foreclosure rate became the worst in the nation. The city had a projected $26 million budget shortfall in 2012 plus $700 million in long-term debt, with no relief in sight. Unemployment ran as high as 22% in 2011. With the highest crime rate in California for cities over 100,000 population and the tenth-highest crime rate in the nation, Stockton has already laid off 100 police officers. It also cut its fire department by 30 percent and general city staff by 40 percent, but that still wasn’t enough to stave off bankruptcy.

Stockton’s bond rating is in junk status after disastrous financial decisions, including selling bonds to invest $125 million in a pension fund that is now worth $100 million and will cost the city $248 million in payments. A $48 million office building, purchased for a new city hall, was repossessed by creditors along with three city parking garages after Stockton defaulted on three sets of bonds. Today, both current and retired city employees are threatened with the reality that their pensions and health care benefits will be cut or eliminated because the pension system has only 59 percent of the money it should have, with a deficit of around $538 million. Not surprisingly, Stockton has twice been ranked the “most miserable city in America” by Forbes magazine.

The only significant driving economic force, funded by state bonds, is the construction of the 1,722-bed prison hospital, which is the lynchpin of the court-ordered federal healthcare Receiver’s solution to California’s chronically unconstitutional prison medical and mental health care. Surrounded by a lethal electrified fence with 11 guard towers, the construction project will employ 1,700 workers. The facility, with 31 buildings and an on-site power plant, is anticipated to open in July 2013. The overall economic impact of the construction project on the local community is estimated at $1 billion. Not to mention the 2,400 jobs the facility will create.

There is a growing need for the new prison hospital, as California’s prison population continues to age due to lengthy sentences imposed under the state’s Three Strikes law.
Although California has significantly reduced its prison overpopulation due to a federal court order [see: PLN, July 2011, p.1], the increase in elderly prisoners, with concomitant health problems, means the prison hospital will soon be filled, thus helping to stabilize Stockton’s downward fiscal spiral.

But that won’t cure the reality that the city is currently bankrupt. “We have hit the wall; we are insolvent,” stated Mayor Ann Johnston. “This is the action that we must take to keep the services that are important for the safety and health of our citizens.”
Fortunately for city officials, the new prison hospital may well be the city’s financial salvation.

Sources: Reuters, Wall Street Journal, www.chcfstockton.com, www.tcw.com, New York Times, www.homefacts.com, www.scpr.org

 

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