Stockton set to become largest U.S. city to declare bankruptcy
STOCKTON -- Officials in Stockton said Tuesday that mediation with the city's creditors has failed, meaning it is set to become the largest American city ever to declare bankruptcy.
City Manager Bob Deis said officials were unable to reach a deal to
restructure hundreds of millions of dollars of debt under a new state law
designed to help municipalities avoid bankruptcy.
Monday marked the three-month deadline for negotiations.
"Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency," Deis said at a City Council meeting. He said, however, that the city was still negotiating with some creditors and could reach deals with as many as one-third of them.
"We think Chapter 9 protection is the only choice left. If we get any agreements, those will be honored in Chapter 9," Deis said.
The Council was expected to vote later Tuesday on a special bankruptcy budget to plug next year's anticipated $26 million deficit, and city lawyers could file for Chapter 9 protection in court as soon as Wednesday.
The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers.
In the past three years, officials in the city that was slammed by the collapse of the housing market dealt with $90 million in deficits through a series of drastic cuts.
They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits.
To plug next year's anticipated $26 million shortfall, the proposed budget would suspend payments for debts and legal claims, reduce payments for retiree medical benefits, further cut some pay and benefits, and increase revenue through code enforcement and parking citations.
The proposed budget includes no major service reductions, Deis said earlier.
"The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation," he said. "Bankruptcy provides the equivalent of a pause button. It retains services and provides structure so you don't have a bunch of lawsuits."
In a standing-room only chambers Tuesday, former city employees told council members talked about their life-threatening medical conditions and said benefit cuts meant they would effectively lose their health insurance.
"For me, bankruptcy might as well be a life sentence," said Gary Jones, a retiree who used to be a police officer in Stockton and said he was diagnosed with a brain tumor.
Other residents complained about plummeting property values, and recurring break-ins and robberies.
"he average citizen will not put up with this. Their home prices have plummeted, they have no jobs, a lot of people are getting fed up so that they have to resort to crime." said Gregory Pitsch, a 22-year-old unemployed resident who made an unsuccessful run for mayor. "I'm asking you to make the right decision, not destroy the property values in this city, which bankruptcy will do."
But city officials said Stockton has run out of options. In recent years, thousands of new homes mushroomed in Stockton, part of a suburban housing boom that attracted buyers from the San Francisco Bay area and beyond.
When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees.
Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden.
In addition, expensive city investments -- a promenade, sports arena and hotel -- failed to produce an economic boon.
The city also has high crime and unemployment rates. It has twice topped Forbes magazine's list of "America's most miserable cities."
Under a bankruptcy filing, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton.
The judge would decide which creditors should be paid, how much and in what order. He would make allowances for expenditures needed by the city to function, and it would be up to city officials to decide how to spend that money.
"One of the reasons a city might want to go the bankruptcy route is that they don't want a situation where they have to pay out debts and have to close the police or fire department," Benedetti said. "Filing for Chapter 9 means you're asking the court to protect you against lawsuits from people who hold your debt."
Stockton's bankruptcy would make it the largest city by population to file for Chapter 9 protection, according to Jim Spiotto, a Chicago bankruptcy lawyer who tracks such cases. He said Bridgeport, Conn., was the largest city to file for bankruptcy, which it did in 1991, followed by Vallejo, Calif., which filed in 2008.
Jefferson County in Alabama is the largest local government bankruptcy filing to date in terms of the size of its debt. It occurred in November 2011 and was followed by Orange County, Calif., in 1994.
If a judge approves a bankruptcy plan, money to pay creditors would come from Stockton's general fund, which pays chiefly for public safety, including police and fire protection.
Experts say the bankruptcy filing, while protecting the city from catastrophe in the short run, should not be seen as Stockton's panacea.
"Bankruptcy won't take away Stockton's underlying financial problems, one of which is the economy, the high unemployment rate and the high foreclosure rate," Benedetti said. "It will take years for them to come out of this."
Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than 6 months old.
Under the law, municipalities considering bankruptcy must first negotiate behind closed doors with creditors for up to three months, with the goal of settling debts without filing for Chapter 9 protection.
Stockton officials have said that even with a bankruptcy, they are optimistic. They point to Vallejo, a smaller California city that filed for Chapter 9 protection in 2008 and emerged from bankruptcy last year.
"Vallejo is leaner, smarter and they've got the confidence of their citizenry," Deis said. "I think Stockton will be doing the same."
Benedetti said Stockton has some things going for it: An excellent location, successful inland port and good university.
"It has some promising economic resources, so it's not all down and out," he said.
POPULATION: 290,000, 13th-largest city in California.
LOCATION: About 80 miles east of San Francisco. Surrounded by farmland and home to a deep-water port on the San Joaquin River. Major industries include agriculture and shipping. A large youth prison also provides hundreds of jobs.
CLAIM TO FAME: Annual Stockton Asparagus Festival in April attracts 100,000 people and features delicacies such as deep-fried asparagus spears and asparagus ice cream.
TRIVIA: Once known as "Mudville," locals have long believed their city was the inspiration for "Casey at the Bat," the famous poem in which Casey strikes out and breaks the hearts of Mudville Nine fans.
NOTABLE STOCKTONIANS: Musican/actor Chris Isaak; mixed martial arts fighter Nick Diaz; Maxine Hong Kingston, author of "The Woman Warrior."
TITLES: The National Civic League awarded Stockton "All-America City" status in 1999 and 2004. Forbes named Stockton "most miserable city" in 2009 and 2011, and "miserable city" runner-up in 2008
Monday marked the three-month deadline for negotiations.
"Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency," Deis said at a City Council meeting. He said, however, that the city was still negotiating with some creditors and could reach deals with as many as one-third of them.
"We think Chapter 9 protection is the only choice left. If we get any agreements, those will be honored in Chapter 9," Deis said.
The Council was expected to vote later Tuesday on a special bankruptcy budget to plug next year's anticipated $26 million deficit, and city lawyers could file for Chapter 9 protection in court as soon as Wednesday.
The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers.
In the past three years, officials in the city that was slammed by the collapse of the housing market dealt with $90 million in deficits through a series of drastic cuts.
They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits.
To plug next year's anticipated $26 million shortfall, the proposed budget would suspend payments for debts and legal claims, reduce payments for retiree medical benefits, further cut some pay and benefits, and increase revenue through code enforcement and parking citations.
The proposed budget includes no major service reductions, Deis said earlier.
"The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation," he said. "Bankruptcy provides the equivalent of a pause button. It retains services and provides structure so you don't have a bunch of lawsuits."
In a standing-room only chambers Tuesday, former city employees told council members talked about their life-threatening medical conditions and said benefit cuts meant they would effectively lose their health insurance.
"For me, bankruptcy might as well be a life sentence," said Gary Jones, a retiree who used to be a police officer in Stockton and said he was diagnosed with a brain tumor.
Other residents complained about plummeting property values, and recurring break-ins and robberies.
"he average citizen will not put up with this. Their home prices have plummeted, they have no jobs, a lot of people are getting fed up so that they have to resort to crime." said Gregory Pitsch, a 22-year-old unemployed resident who made an unsuccessful run for mayor. "I'm asking you to make the right decision, not destroy the property values in this city, which bankruptcy will do."
But city officials said Stockton has run out of options. In recent years, thousands of new homes mushroomed in Stockton, part of a suburban housing boom that attracted buyers from the San Francisco Bay area and beyond.
When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees.
Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden.
In addition, expensive city investments -- a promenade, sports arena and hotel -- failed to produce an economic boon.
The city also has high crime and unemployment rates. It has twice topped Forbes magazine's list of "America's most miserable cities."
Under a bankruptcy filing, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton.
The judge would decide which creditors should be paid, how much and in what order. He would make allowances for expenditures needed by the city to function, and it would be up to city officials to decide how to spend that money.
"One of the reasons a city might want to go the bankruptcy route is that they don't want a situation where they have to pay out debts and have to close the police or fire department," Benedetti said. "Filing for Chapter 9 means you're asking the court to protect you against lawsuits from people who hold your debt."
Stockton's bankruptcy would make it the largest city by population to file for Chapter 9 protection, according to Jim Spiotto, a Chicago bankruptcy lawyer who tracks such cases. He said Bridgeport, Conn., was the largest city to file for bankruptcy, which it did in 1991, followed by Vallejo, Calif., which filed in 2008.
Jefferson County in Alabama is the largest local government bankruptcy filing to date in terms of the size of its debt. It occurred in November 2011 and was followed by Orange County, Calif., in 1994.
If a judge approves a bankruptcy plan, money to pay creditors would come from Stockton's general fund, which pays chiefly for public safety, including police and fire protection.
Experts say the bankruptcy filing, while protecting the city from catastrophe in the short run, should not be seen as Stockton's panacea.
"Bankruptcy won't take away Stockton's underlying financial problems, one of which is the economy, the high unemployment rate and the high foreclosure rate," Benedetti said. "It will take years for them to come out of this."
Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than 6 months old.
Under the law, municipalities considering bankruptcy must first negotiate behind closed doors with creditors for up to three months, with the goal of settling debts without filing for Chapter 9 protection.
Stockton officials have said that even with a bankruptcy, they are optimistic. They point to Vallejo, a smaller California city that filed for Chapter 9 protection in 2008 and emerged from bankruptcy last year.
"Vallejo is leaner, smarter and they've got the confidence of their citizenry," Deis said. "I think Stockton will be doing the same."
Benedetti said Stockton has some things going for it: An excellent location, successful inland port and good university.
"It has some promising economic resources, so it's not all down and out," he said.
Stockton at a glance:
POPULATION: 290,000, 13th-largest city in California.
LOCATION: About 80 miles east of San Francisco. Surrounded by farmland and home to a deep-water port on the San Joaquin River. Major industries include agriculture and shipping. A large youth prison also provides hundreds of jobs.
CLAIM TO FAME: Annual Stockton Asparagus Festival in April attracts 100,000 people and features delicacies such as deep-fried asparagus spears and asparagus ice cream.
TRIVIA: Once known as "Mudville," locals have long believed their city was the inspiration for "Casey at the Bat," the famous poem in which Casey strikes out and breaks the hearts of Mudville Nine fans.
NOTABLE STOCKTONIANS: Musican/actor Chris Isaak; mixed martial arts fighter Nick Diaz; Maxine Hong Kingston, author of "The Woman Warrior."
TITLES: The National Civic League awarded Stockton "All-America City" status in 1999 and 2004. Forbes named Stockton "most miserable city" in 2009 and 2011, and "miserable city" runner-up in 2008
Are you thinking about filing bankruptcy? Please call San Jose bankruptcy lawyer and Bay Area Bankruptcy attorney Geoffrey Nwosu to answer your bankruptcy questions at no cost. Times are tough and our economy is still trying to adjust. Filing bankruptcy may help you to eliminate your debts and start fresh. Please call 408-375-7703 for your bankruptcy and foreclosure needs.
