|Stockton Files for Bankruptcy Protection|
|Thursday, 12 July 2012 13:05|
Stockton, California’s 13th largest city with 292,000 residents, filed for bankruptcy June 28 after talks with bondholders and labor unions failed, making the agricultural center the biggest U.S. city to seek court protection from creditors, out of the 640 American local governments that have failed since Chapter 9, Title 11 of the Bankruptcy Code was adopted in 1937.
“The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection,” Stockton said in a statement released after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. “In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation.”
The city owes nearly $1 billion in long-term debt, and the city’s 2012-13 fiscal year general fund would have a $26 million deficit without the bankruptcy filing. The city’s debt has been attributed to one of the nation’s most generous healthy retiree benefit plans, large projects such as the Stockton Arena, the Bob Hope Theater renovation, a new City Hall and renovation of the marina.
Stockton’s “Pendency Plan” budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court.
“It’s a sad day in the city of Stockton,” Mayor Ann Johnston said before the budget vote. “I see no other solution to this.”
Municipal bankruptcies in the U.S., while still rare compared to corporate filings, became more common after the housing and financial crisis began. Ten of 42 cases filed since 1981 came in the past four years, according to court records.
Investors buy municipal debt for its relative safety and low default rate. The average cumulative default rate in the past four decades was 0.13 percent for municipal bonds versus 11.2 percent for corporate debt, according to Moody’s Investors Service data.
Stockton’s bankruptcy will probably resemble the 2008 case of another California city, Vallejo, which exited court protection last year. Both cities were hurt by high labor costs, particularly life-time health insurance for retirees.
The city began a process during which it is required by state law to review its finances with help from a “neutral observer” who is picked in cooperation with creditors. That review is similar to a mediation process in which creditors have a right to participate, according to the law, passed last year at the behest of California public employee labor unions.
Negotiations with creditors began on March 27 and were extended to June 25. The California Public Employees’ Retirement System, the largest U.S. pension fund, and San Francisco-based Wells Fargo & Co. (WFC), the nation’s biggest home lender, and bond insurer Assured Guaranty were among at least 18 creditors involved in the talks.
Salaries for current workers and benefits for them and former employees account for about 68 percent of the city’s general fund, the city said.
The city has cut services so much the past two years that “public safety is at a crisis level,” officials said in a June 5 fiscal report. Unemployment, at 15.4 percent in April, was almost double the national average, according to the U.S. Department of Labor. Stockton ranked third in murders last year among large California cities, behind Los Angeles and Oakland, according to FBI data.
The collapse of the housing market left Stockton to contend with mounting retiree health-care costs and eroding tax dollars in the wake of the recession, amid accounting errors that overstated municipal revenues. One in every 195 homes in Stockton’s metropolitan area received a foreclosure filing in May, the fifth-highest rate in the U.S., according to RealtyTrac Inc