Stockton, Calif., Faces Bankruptcy

June 26, 2012 -- Stockton, Calif., could file for bankruptcy as early as Wednesday, according to its city manager.

If that happens, the town of about 300,000 people on the San Joaquin River will become the biggest U.S. city to go broke.

When Stockton's city council meets tonight to decide the city's fate, the proceedings will be telecast live on Stockton's website.

The town's finances are so bad that a journalist from Barcelona, Spain, is covering the situation, in hopes of giving his readers back home in southern Europe pointers on what not to do.

"I am doing a couple of stories, trying to understand what the parallels and differences are between the California and the Spanish and Greek debt crises and what lessons can be learned," Marc Bassets, correspondent for the newspaper La Vanguardia, told the Stockton Record. "How is California dealing with the issue?"

Vallejo, Calif., with half the population of Stockton, is the largest U.S. city to date to file for bankruptcy.

The benefit of a bankruptcy filing, Stockton officials say, would be to buy time for Stockton to renegotiate its debts on terms more advantageous to the city. It would remove, at least temporarily, the need for Stockton to make budget cuts even more drastic than those already made.

To make such cuts, the city says in a June 20 statement, would be to invite chaos: "Continued service reductions will harm the health and safety of [Stockton] citizens."

Mayor Ann Johnston said, "We cannot sacrifice the health, safety and welfare of our community."

Stockton, before the bursting of its real estate bubble in 2007, had been riding high. Between 2000 and 2006, housing prices rose from a median of slightly more than $110,000 to almost $400,000, according to "How Stockton Went Bust," an analysis prepared by by California Common Sense (CCS), a nonpartisan, nonprofit group advocating financial transparency.

The city spent generously on projects to rehabilitate and beautify its downtown. It developed a downtown marina. It augmented the salary and benefits of city workers.

The generous employment agreements to which the city committed in the mid-2000s, says the CCS report, now comprise the bulk of the city's budget. "The city now faces more than $800 million in unfunded liabilities for pensions and other retirement benefits," the report notes.

The City Council has addressed about $90 million in deficits in the past three years, in part by eliminating 25 percent of the city's police force, 30 percent of its firefighters, and 43 percent of all other employees, according to a news release issued by the city.

It has sought to boost revenue through fines and parking citations, eliminating payments of bonds, modifications to terms of its labor agreements, and salary and benefit reductions.

Despite such efforts, the city now faces a $26 million deficit in the fiscal year that begins July 1. California's state Constitution requires cities to adopt a balanced budget by July 1 of each year.

Stockton is the first financially troubled city in California to be subject to a new state statute, AB 506, which requires cities and their creditors to submit to arbitration before filing, in an effort to avoid bankruptcy, says bankruptcy expert Karol Denniston, a partner at law firm Schiff Harden in San Francisco. The last day of the required arbitration period ended Monday.

Confidentiality requirements preclude the city, its unions or its other creditors from commenting publicly on the outcome of those negotiations.

"We have to be prepared for any potential outcome of the confidential mediation," Mayor Johnston said in a statement last week. "If we don't reach agreements with our creditors that help us avoid insolvency, we have to be prepared with alternatives that we have worked so hard to avoid," meaning bankruptcy.

City Manager Bob Deis said in the same statement, "This is not where any of us wanted to be, but, absent restructuring agreements with our creditors, any other options would decimate the city.

If the city files for bankruptcy protection, he said, "Stocktonians will not see any measurable change in service levels, come July 1."