Stockton, California files bankruptcy petition

Thu Jun 28, 2012 10:25pm EDT

A local newspaper headline announces bankruptcy in Stockton, California June 27, 2012. REUTERS/Kevin Bartram

A local newspaper headline announces bankruptcy in Stockton, California June 27, 2012.

Credit: Reuters/Kevin Bartram

(Reuters) - Stockton, California, became the largest city to file for bankruptcy in U.S. history on Thursday, after years of fiscal mismanagement and a housing market crash left it unable to pay its workers, pensioners and bondholders.

The filing, announced by the city of 300,000 people, followed three months of confidential talks between the city and its creditors aimed at averting bankruptcy.

"We are now a Chapter 9 debtor," said Marc Levinson, a lawyer representing Stockton, noting he filed the city's voluntary petition in U.S. Bankruptcy Court for the Eastern District of California in Sacramento, California as Case 12-32118.

Levinson said pleadings in support of Stockton's eligibility for Chapter 9 bankruptcy will be filed on Friday.

"We are extremely disappointed that we have been unable to avoid bankruptcy," Mayor Ann Johnston said in a statement. "This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens."

The negotiations ended on Monday with Stockton failing to win enough concessions to help close its shortfall for the fiscal year starting on July 1.

"Our general fund resources are depleted, and we cannot allow the city to spiral into uncontrolled default," City Manager Bob Deis said. "Bankruptcy stops a barrage of lawsuits and allows the city breathing room while working toward a plan of adjustment and moving Stockton forward."

The filing of Chapter 9 bankruptcy, a rare event for the U.S. municipal issuers, was left as the only option to close a deficit of $26 million for the budget of the new fiscal year.

The budget suspends $10.2 million in debt payments and cuts employee compensation and retiree benefits by $11.2 million. About $7 million in savings would come from cutting retiree medical benefits for one year. The retiree medical benefits will be eventually eliminated.

Stockton becomes the nation's most populous to file for Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the biggest in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011. Stockton has about $700 million in bond debt.

Stockton has suffered a sharp drop in revenue since the collapse of its once red-hot housing market, forcing it to cut more than $90 million in spending in recent years.

The housing boom transformed the farming city into a distant bedroom community of the San Francisco Bay area, and the bust put it at, or near, the top of national foreclosure rankings in recent years.

Standard & Poor's Ratings Services downgraded Stockton to default from selective default on Wednesday, citing the city's move toward bankruptcy and expectations that it will not substantially pay all of its obligations as they come due.

Moody's Investors Service on Wednesday cut to 'Caa3' various general fund-supported debts of the city, putting the ratings in the "substantial risk" category, one notch above the "may be in default, extremely speculative" grouping. Moody's said its move was based on Stockton's bankruptcy budget.

(Reporting by Jim Christie; Editing by Tiziana Barghini and Stacey Joyce)

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