Lessons from Stockton

Arena debt was part of the slide, possible bankruptcy

If you build it, they will come. But for Stockton, not as many came as expected. And now, a bankruptcy judge might come, too.

Stockton, a city that built a brand-new arena in 2005, now can’t pay its debt and limps toward bankruptcy. Sacramento, poised to spend $256 million of city money on a new arena, might want to consider the experience of its neighbor just 50 miles south.

“We have issues with gangs and drugs and less tools to fight [them],” says Stockton City Councilwoman Susan Eggman. “So, yeah, some would say, rather than [build] that arena—it was before I was on the council—they could have really invested that money in neighborhoods [and] we may have been able to weather this storm better.”

Last Tuesday, the Stockton City Council voted to undergo mediation to avoid bankruptcy. If the city is able to work with unions, creditors and bondholders to restructure its debt, it will hopefully avoid that fate. If not, it will be the nation’s largest city—population nearly 300,000—to file Chapter 9. And then a bankruptcy judge will intervene, determining which bills get paid.

Building the Stockton Arena—which cost $69 million (more if you include infrastructure)—was a contributing factor to the city’s current problems, says Eggman—but hardly the only one. She mentioned a ballpark, redevelopment projects and other expenditures—during years of economic boom—contributing to nearly half-a-billion dollars in bond debt.

It was like a “perfect storm,” she says, citing high unemployment and foreclosure rates, and a big, unfunded retiree health-care liability of more than $400 million, as additional factors in the debt problem. The city’s general fund has become reduced to the point, Eggman says, it would be unsafe to cut any more services.

Sacramento, according to the United States Bureau of Labor Statistics, also has a higher than national average unemployment rate. And according to RealtyTrac in January, Sacramento’s foreclosure rate was the nation’s seventh highest. (Stockton’s rate topped the list.)

Eggman wouldn’t comment on Sacramento’s arena proposal, but she did mention where the Stockton Arena went wrong financially.

“One of the mistakes being made with our arena was the contract they did with [International Facilities Group] who [managed] the arena; it wasn’t in the best interest of the city,” says Eggman. “We have a new arena manager [now], SMG, who is trying to turn some things around. The problem was [the arena] was very expensive, and it hasn’t provided the return more optimistic people thought it’d provide.”