Public Finance: Budget Deficiencies and Alternative Financing Options for Stockton Municipality

This paper discusses the budget deficiencies of Stockton Municipality, its demographics, previous three-year trend of major revenue sources and expenditures, and three recommendations for alternative financing options.

Running head: PUBLIC FINANCE 1
Public Finance
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Introduction

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The main purpose of this paper is to locate the budget of a municipality that has
completed a petition to file bankruptcy. The municipality discussed in this paper is Stockton
California. The demographics of this municipality are discussed as well as the previous three-
year trend of its major revenue sources and expenditures. Furthermore, the paper has analyzed
the impact of the issues that contribute to the budget deficiencies of the municipality, and three
recommendations have been provided for alternative options of financing.
The Demographics of Stockton Municipality
Stockton is the largest municipality to file a petition for bankruptcy in the United States.
The municipality is placed in the fourth rank in the county of Portage in regard to geographic
size. Stockton has a population of approximately 310,496 individuals, and it is ranked in the
thirteenth position in among the 1,498 cities of California State. It is closely followed by Chula
Vista and Irvine cities, which have a population of 270,471 and 277,453 citizens respectively.
The population of Stockton is comprised of mainly Hispanic ethnic or racial group, which forms
about 41.7% of the municipality’s total population. The residents of Stockton Municipality have
a median age of approximately 32 years. Additionally, its residents had a median income of
$46,033 during the fiscal year 2016 (Haugen, Musser, Berger & Thomson Gale (Firm), 2012).
According to United States Census Bureau, 7.8%, 28.6% and 11.6% of Stockton’s
population was comprised of individuals under five years, individuals under eighteen years and
those with 65 years of age and above during the year 2017. Additionally, 51% of its population
was comprised of females. Between 2012 and 2016, Stockton had 11,589 veterans while 26% of
its population were individuals born in foreign countries. In addition to this, 74.8% of its
population was comprised of graduates in high school education or higher, while 17.4%
comprised individuals owning Bachelor’s degrees or higher, for persons with 25 years of age

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and above during the years between 2012 and 2016. With regard to health, 9.5% of its
population is comprised of disabled individuals who are under 65 years of age, while 14%
comprises of individuals aged below 65 years, who do not have any health insurance cover
(U.S. Census Bureau QuickFacts: Stockton city, California, 2018).
Previous Three-Year Trend of the Municipality’s Major Revenue Sources and
Expenditures
According to its annual budgets, Stockton City has separate funds including the general
fund, which is considered the main fund for its daily operations. The general fund forms the
greatest part of this municipality’s budget, and it reports on all financial resources with an
exception to those reported in other types of funds. The main revenue sources for Stockton are
property taxes, business taxes, service fees, utility user taxes and sales tax. The municipality
also earns revenue from enterprise funds, which is the fees charged for services provided such
as garbage collection and water as well as sewerage system. According to its adopted budgets
for the financial years 2017-2018, 2016-2017 and 2015-2016, Stockton Municipality had the
following expenditures for the respective previous three years (Budget - City of Stockton,
2018).
Program Appropriations (Expenditures)
Item of Expenditure FY 2017-18 FY 2016-17 FY 2015-16
Police 119,872,529$ 55% 110,072,924$ 54% 105,110,741$ 53%
Fire 42,105,239$ 19% 39,012,489$ 19% 40,222,603$ 20%
Public works 11,800,711$ 5% 11,642,352$ 6% 10,072,152$ 5%
Community services 8,091,500$ 4% 9,014,000$ 4% 8,891,500$ 4%
Economic development 6,361,058$ 3% 7,138,634$ 4% 6,678,971$ 3%
Adminstration 19,636,434$ 9% 20,759,638$ 10% 17,933,884$ 9%
Capital Improvements 868,600$ 1% 1,933,000$ 1% 5,485,000$ 3%
Other Expenditures (programs) 3,411,484$ 2% 2,775,682$ 1% 3,804,692$ 2%
Debt servicing 4,906,848$ 2% 1,443,873$ 1% 1,422,273$ 1%
TOTAL 217,054,403$ 100% 203,792,592$ 100% 199,621,816$ 100%

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As demonstrated above, the adopted expenditures for general fund during the financial
year 2017-2018 are approximately $217 million, which is recognized as an increase of $13.2
million from the expenditures of the financial year 2016-2017. Besides, the adopted
expenditures increase by $4.17 million during the financial year 2016-2017 from that of the
previous financial year 2015-2016. Furthermore, $2.1 million in a one-time funding for
priorities of the municipality has been included in its adopted annual budget for the year 2017-
2018 in comparison to 2016-2017 financial year’s funding of $3.7 million (Budget - City of
Stockton, 2018).
The Impact of the Issues Contributing to the Municipality’s Budget Deficiencies
The budget deficiencies of Stockton are highly attributed to financial and housing
collapses, excessive compensation of public employees, excessive optimism and poor timing in
bond offering. These factors, which resulted into bankruptcy of the municipality, are believed to
have various impacts that led to its budget deficiencies. These are discussed below.
i. The financial and housing collapses caused significant inflation in the prices of real
estates and decreased economic growth which resulted into decrease in revenue in
the Stockton city. This reduced the optimism of potential growth of Stockton on the
onset of the 2008 financial crisis in the United States. This caused the revenues of
the municipality to drop significantly (Dalton, 2013).
ii. Excessive compensation of public employees and excessive optimism led to
willingness of Stockton city to employ various individuals during the mid of 2000s,
mostly during 2005 and 2008. This led to increased expenditures on pensions,
salaries and other attributed benefits.

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iii. Poor timing of bond offering resulted from the need of the municipality to lower its
high costs of pensions, which necessitated it to undertake bond offering purposely
for lowering its payments of interest on an obligation of approximately $125 Million
on its pensions. Due to this poor timing, the city is obligated to pay back the debts at
$248 million, which is very costly.
Three Recommendations for Alternative Financing Options
There are three recommended alternative options that can be used by Stockton city to
finance its budget. These are discussed below.
i. Tax Anticipation Note (TAN), which is a short-term security of a debt that a
Stockton municipality can issue for financing its immediate projects which will be
payable in future through future collections of taxes (Dalton, 2013).
ii. Bond Anticipation Note (BAN) which is a short term security that bears interest.
Stockton Municipality can issue this type of security prior to issuance of a bigger
bond in future. This security can be issued for purposes of generating funds for
financing forthcoming projects (Dalton, 2013).
iii. Revenue Anticipation Note (RAN), which is type of a bond issued by a municipal. In
this case, Stockton municipality can borrow money with a view to financing its
projects and then repaying the debt using the projects’ generated revenue
(Dalton, 2013).
Conclusion
As discussed in the above sections, Stockton is considered the largest municipality that
has filed for bankruptcy in the United States. It is among the cities with the largest population in

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California State. Factors that led to its bankruptcy are housing and financing collapse,
unsustainable compensation of public workers and poor timing of bond issuance.
References
Budget - City of Stockton, CA. (2018). Retrieved from
http://www.stocktongov.com/government/departments/adminServices/budget.html
Dalton, H. (2013). Principles of Public Finance. Hoboken: Taylor and Francis.
Haugen, D. M., Musser, S., Berger, R. M., & Thomson Gale (Firm). (2012). The US census.
Detroit: Greenhaven Press.
U.S. Census Bureau QuickFacts: Stockton city, California. (2018). Retrieved from
https://www.census.gov/quickfacts/fact/table/stocktoncitycalifornia/PST045217