Stockton, California to file for bankruptcy

STOCKTON, California Wed Jun 27, 2012 9:07am EDT

1 of 3. An abandoned warehouse is pictured in Stockton, California in this March 6, 2012 file photograph. Stockton, California will become the largest U.S. city to seek protection from its creditors after its leaders approved a budget on June 27, 2012 night based on the city filing for bankruptcy. A Chapter 9 bankruptcy by the city of nearly 300,000 in California's Central Valley, about 85 miles (135 km) east of San Francisco, could come as early as Wednesday.

Credit: Reuters/Max Whittaker/Files

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STOCKTON, California (Reuters) - Stockton, California will become the largest U.S. city to seek protection from its creditors after its leaders approved a budget on Tuesday night based on the city filing for bankruptcy.

A Chapter 9 bankruptcy by the city of nearly 300,000 in California's Central Valley, about 85 miles east of San Francisco, could come as early as Wednesday.

Stockton's city council voted six to one in favor of the 2012-2013 budget after a contentious five-hour meeting where angry retired city workers pressed council members to reject the $155 million spending plan. It proposes eliminating retirees' medical benefits to help fill a $26 million budget deficit.

Retired police department employee Geri Ridge said she fears not being able to afford health-care insurance.

"I don't have that kind of income," said Ridge, 56, noting she is concerned a large share of her $1,895 monthly pension payment could be consumed by large insurance costs due to her history of heart attacks.

The council's vote followed three months of confidential talks between Stockton and its creditors aimed at averting bankruptcy. The negotiations ended on Monday with the city failing to win enough concessions to help close its shortfall for the fiscal year starting on July 1.

That left bankruptcy as the only way for Stockton to balance its budget in the near term while maintaining its current level of services and bringing stability to its battered finances, Mayor Ann Johnston said.

"It's heart-wrenching to think about the implications," she said. "I see no other solution."

Stockton officials have said since February their city's finances are suffering the combined effects of fiscal mismanagement over two decades, too much debt taken on in good times and generous pay and unsustainable benefits for city employees and retirees.

Stockton has also suffered a sharp drop in revenue since the collapse of its once red-hot housing market. The housing boom transformed the farming city into a distant bedroom community of the San Francisco Bay area and its bust put Stockton at or near the top of national foreclosure rankings in recent years.

To keep its budget in balance, Stockton has cut more than $90 million in spending in recent years and slashed its work force, including a quarter of its police officers, a pressing concern with a surge in violent crime in the city.

Deeper cuts to police payrolls would be intolerable, making a financial restructuring in bankruptcy a necessary if painful choice, according to council members who voted for the budget.

The $3.7 trillion U.S. municipal bond market has so far taken in stride Stockton's march toward bankruptcy despite the city's more than $700 million in bond debt. Bondholders and bond insurers are among Stockton's 18 creditors.

LANDMARK FOR U.S. MUNICIPAL DEBT MARKET

Because municipal bankruptcies under Chapter 9 of the federal bankruptcy code are rare, especially for larger cities, Stockton could set important precedents for how different types of creditors are treated in such cases.

In the past, large cities such as Bridgeport, Connecticut, have seen filings for bankruptcy protection rejected by the court. In the most recent case in October 2011, a filing by Harrisburg, Pennsylvania, a city of nearly 50,000, was rejected because a state law barred municipalities of a certain size from seeking legal protection from creditors.

Lawyers representing Stockton also worked for Vallejo, California when it filed for bankruptcy in 2008. The former Navy town emerged last year from bankruptcy with sharply reduced payments for its retiree medical program.

At $4.23 billion, Alabama's Jefferson County last November set the record for the biggest municipal bankruptcy filing, which is still working its way through the court.

Stockton officials have been considering bankruptcy since February and calling for the kind of drastic action in its budget. It suspends $10.2 million in debt payments, a move likely to trigger further downgrades of Stockton by ratings agencies.

Stockton has already defaulted on about $2 million in debt since February, allowing the trustee for one of its bond insurers to seize a building once slated to be its future city hall and three parking garages.

The intentional default prompted Moody's Investors Service and Standard & Poor's Ratings Services to drop their credit ratings on Stockton. Moody's has cut its issuer rating for Stockton to a junk level Ba2 from Baa1 while S&P has cut its issuer rating on the city from BB to SD, one notch above its D default rating.

Stockton's budget would also cut spending on employee compensation and retiree benefits by $11.2 million. About $7 million in savings would come from cutting retiree medical benefits for one year and then phasing them out, an idea that stuns John Skaff, a retired police officer.

Skaff said knee injuries forced him off Stockton's police department after 19 years there and he expects to need knee-replacement surgery, though he is uncertain how to afford it without his health coverage. "It's a big hit for us," he said.

(Reporting by Jim Christie, Editing by Tiziana Barghini, Lisa Shumaker, Tim Pearce)

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Comments (19)
mikeopinion wrote:
another example people of what these politicians are doing to our country destroying it .and these so called politicians are telling us what we can or can not do what a bunch of crap people its time to make big changes to our system we must figure a way to remove the power from the handful of politicians and give it back to the people .the government has failed us they are doing what ever they want and screwing us over .come on people stand together and boot all these politicians and judges and council members and cops out of america.

Jun 27, 2012 4:53am EDT  --  Report as abuse
paradigum wrote:
Math is Truth. Unsustainable numbers are unsustainable, no matter how you spin them with clever snake oil policies, or try to bury them with denial. What is happening to Stockton must happen to individuals, households, cities, counties, states, and nations. The sooner we flush the ponzi economic games of the last several decades, the sooner we can get on with true recovery, and a real sustainable path for the future.

Jun 27, 2012 4:56am EDT  --  Report as abuse
I’m from Stockton and I’ve been following these events closely the past decade. I am impressed by the accuracy of this article, as most local reports tend to spin everything in a “spending more is always better” kind of light.

This article gives a taste of the kind of waste and corruption Stockton has experienced in its government. This woman in the article making nearly $2,000 in retirement in addition to medical coverage. I wish I was making $2,000 a month now! There are some cold truths that Stockton has to come to terms with. They have been over paying and over promising employees for decades. You remember Bell California? Well imagine instead of 4 or 5 employees making $400,000, imagine literally hundreds making over $100,000. Over 100 in the police department alone, with top payments upwards of $300,000 in a city where $30,000 can outright buy a home.

But of course very few city employees, including literally 0 Stockton Police actually live in Stockton, because none of them have any faith in the city. They wouldn’t dare have their kids walk the streets of the people whose money they take hand over fist.

The same old story with the pay, in the good times the unions made ludicrous deals for high pay and job security, and now in bad times that pay can’t be reduced, every chief of police is guaranteed a massive lifetime package, so every chief just retires a year into their job, now we have a pile of chiefs doing nothing and making millions of taxpayer money for having worked months on the job.

Though employee pay is only the half of it. On a drunken spending spree a decade ago Stockton decided to buy up everything. The arena, the ball park, a hotel, and much bigger buildings, a brand new harbor, hundreds of millions spent for property that isn’t generating any income.

Stockton is only the first. But California’s government is on the same path.

Jun 27, 2012 5:07am EDT  --  Report as abuse
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