A three-audit report on bankrupt Stockton by State Controller John Chiang identifies chaotic mismanagement in the swirl of economic upheaval, but fails to find corruption ala the city of Bell.

The audits blame the city of 300,000 for failing to recognize that the housing market was beginning to tank in 2006, thus endangering its tax base. That’s an oversight shared by just about every mainstream observer of the economy in the media, up and down Wall Street, and in and out of government that year.

Stockton City Manager Bob Deis, while acknowledging that accounting procedures were insufficient, was not impressed with the controller’s report. In response (pdf), he wrote:

“The State Controller's Office is more interested in scoring political points than supporting good governance. Your office appears to be just another political operative that bayonets the wounded after the battle has been fought to repair a distressed city. . . . It produces very little new information.”

The three reports focused on fiscal management practices, misplaced cash from Stockton’s gas tax fund and the unlawful holding of redevelopment assets, respectively.

The management report found that 60.8% of Stockton’s general accounting controls were inadequate. The gas tax report was critical of commingling funds with other city funds and the redevelopment report found the city had held onto $1.4 million in funds the state demanded after Governor Jerry Brown pushed through legislation dissolving the agencies. The state is suing, and being sued by, a number of local entities that objected to the state’s grab of hundreds of millions of dollars in redevelopment funds.

Deis thought the audits were nitpicking, unnecessary and conducted in an unprofessional manner. He particularly objected to what he considered the state’s dismissal of what he and new municipal administrators had done since the city began spiraling out of control. Deis attempted to give the June 2012 bankruptcy some context.

“The simple fact is we inherited a mess. The City cut 43 percent of its non-safety staff. Our first priority was avoiding an uncontrolled financial default, balancing a budget, developing a plan for recovery, continuing to provide city services and building the organizational capacity. In our spare time we responded to an unprecedented crime wave. . . . Your audit ignores these facts of life.”

Chiang was not impressed with Deis’ response and responded with a point-by-point refutation, capped by one final smackdown. “We hope that these detailed corrections of your misstatements and false accusations will cause you to revisit your dismissive attitude regarding our audit findings and recommendations,” Chiang wrote.

Stockton is currently locked in a struggle with bondholders and their insurers over the paying of debts. They want Stockton to raise taxes, curtail city services, sell municipal property and renege on its obligations to the California Public Employees’ Retirement System (CalPERS) before asking them to take a haircut on $900 million in debt.

Cities across the country, the latest being Detroit, are being villainized for the economic hits they took when the housing and Wall Street crash in 2008 exposed the precarious condition they had been put in by decades of globalization, de-industrialization and shifts in political power. Their problems are often blamed on the presence of unions, lack of privatization, corruption and incompetence.

In California, cities have also had to wrestle with the pernicious after-effects of Proposition 13 and a state perpetually teetering on the brink of bankruptcy, always looking for ways to divert revenues from cities and counties while shifting financial responsibilities to them.

–Ken Broder

To Learn More:

Audit Hammers Bankrupt California City’s Financial Management (by Jim Christie, Reuters)

Stockton's Woes Came from Mistakes, Not Corruption, State Says (by Diana Marcum, Los Angeles Times)

Controller Releases Stockton Audits (California State Controller)

State Controller and Stockton City Manager Exchange Views (pdf)

Stockton Wasn’t Lying—It Really Is Bankrupt (by Ken Broder, AllGov California)