Stockton Council’s 6-1 Vote Clears Way for Bankruptcy

Stockton City Hall (via Tourist Bureau)

Stockton’s City Council voted 6-1 Tuesday night to clear the way for becoming the largest U.S. city ever to declare bankruptcy.  It could file for Chapter 9 protection as early as Wednesday. The city on nearly 300,000 in California’s central valley is already virtually insolvent, having refused to make some “non-essential” bond payments.

In a council chamber packed to overflowing into an anti-room and a downstairs overflow area, a parade of citizens, city employees and retirees berated the council for allowing the fiscal mess to become so dire.  City Manager Bob Deis said 60 days of negotiation with the city’s major bondholders and other creditors failed to reach a compromise that would give the city breathing room.  “Unfortunately no compromise agreement with creditors could be reached,” he said.  “We’re still negotiating and are close to agreement with one-third of the creditors.”

But that was not enough to blunt the anger of retired firefighters, police and other city retirees who will find themselves without health coverage on July 1.

Gary Jones, who worked as a police officer from 1994 to 2006, said he has a brain tumor and without insurance coverage he won’t be able to afford care.  “If I lose this medical coverage it is a life sentence,” he said.  “This is destroying my life.”

One woman who worked as a dispatcher for police said she has battled cancer and has a daughter with a heart condition and can’t survive without insurance.  “I spent the last week lying awake in bade thinking of all the Christmases I missed, all the Thanksgivings because I kept my commitment to the city.  You failed to keep your commitment  to us,” she told council members.

The city has cut $90 million in the last three years but still finds itself $26 million short to balance its budget by July 1, with the start of the new fiscal year.  It has already cut police 25 percent, fire fighters 30 percent and half the city staff.  Two parking garages and an office building intended as a new city hall were repossessed by banks.

The largest single problem is a $416 million unfunded retiree health care program, according to Deis.

The city grew rapidly during the housing bubble, as an inexpensive place to buy a home and commute to the San Francisco Bay Area.  The city used the construction boom as the basis for lavish borrowing to build and improve the city, as well as maintaining above—market benefits for its workers.  But with the mortgage market crash and recession the city became second only to Las Vegas in number of foreclosures.  Housing values plunged from  a median of $407,000 to $179,000 in a few short years.

Deis told the council,  “We’re doing triage.  We’re cutting off an arm – referring to retiree health benefits – to save the body.”

His comments generally drew moans or cat calls from the crowd.

The city’s private bankruptcy attorney Mark Levinson said after the session that the mediation produced agreement from six of 18 major creditors to accept a deal, but not enough to cover the $26 million shortfall.  He declined to say how much the six creditors controlled of the dollar amount of the debt.

The council passed three separate resolutions to approve a new pendency budget, a precursor to bankruptcy, to end retiree health care and make certain wage cuts to union and management employees.

Only councilman  Dale Fritchen voted against the move to file for Chapter 9 bankruptcy.  He pointed to millions of dollars in uncollected library fines, parking fines and substantial legal fees that could pare the budget.

If the city files for bankruptcy protection, that too with be a costly proposition.  The new budget sets aside $3.5 million to pay the lawyers and administration of a bankruptcy, with no guarantee that it will be enough.




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