By Jim Christie
SAN FRANCISCO, June 28 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
The filing by the city of 300,000 people followed three
months of confidential talks with its creditors aimed at
"We are now a Chapter 9 debtor," Marc Levinson, the lawyer
who filed the city's voluntary petition in the Eastern District
of California, in Sacramento (Case 12-32118) told Reuters.
Pleadings in support of Stockton's eligibility for Chapter 9
bankruptcy will be filed on Friday, Levinson said.
Stockton, which officially declared insolvency and its
desire to restructure its debt, also filed a separate list of
its major unsecured creditors.
The California Public Employees' Retirement System, which
manages Stockton's pension plan, tops the list. The retirement
system has a $147.5 million claim for unfunded pension costs.
Other top creditors include investors holding $124.3 million
of Stockton's pension obligation bonds, $40.4 million of the
city's variable rate demand obligations, $35.1 million of the
city's public facilities fees bonds and $31.6 million of the
city's parking garage debt.
Wells Fargo Bank NA is listed as the trustee for the
"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."
Negotiations with creditors ended on Monday with Stockton
failing to win enough concessions to help close its b udget
s hortfall for the fiscal year starting on July 1. The city will
also file a motion to request permission to share information
from the confidential mediation process.
HEALTHCARE TO BE PHASED OUT, PENSIONS UNCHANGED
The Chapter 9 bankruptcy filing, a rare event for U.S.
municipal debt issuers, was left as the only option to close a
deficit of $26 million in Stockton's budget for its the new
fiscal year, according to city officials.
The budget approved on Tuesday by Stockton's city council
suspends $10.2 million in debt payments and cuts employee
compensation and retiree benefits by $11.2 million to help close
About $7 million in savings would come from cutting retiree
medical benefits for one year.
While the retiree medical benefits will eventually be
eliminated, Stockton plans to leave its public pensions
unchanged while in bankruptcy proceedings. Attempts to pare them
would invite long and expensive challenges.
City Manager Bob Deis said he was out of options to balance
the city's budget after deep cuts in recent years to Stockton's
work force. City leaders rejected further cuts to the police
department as Stockton is experiencing a surge in violent crime.
The city will maintain current levels of public services,
although at the cost of Stockton shedding its retiree medical
program and defaulting on more of its bonds, Deis told Reuters.
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.
"We need to spread the pain. What's left are creditors, our
bondholders and retirees," Deis said.
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
Stockton becomes the nation's most populous city to file for
Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the
biggest municipal bankruptcy 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.
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.