Largest US Municipal Bankruptcy Filed

Stockton's City Hall

Stockton, California became the largest U.S. city to declare bankruptcy listing nearly $500 million in debts from just its top 20 unsecured creditors.

The filing in federal bankruptcy court in Sacramento came just two days after an emotional city council meeting, packed with city retirees and employees pleading not to cut off their health benefits and take the step of filing for bankruptcy protection.

But the council for the city of 300,000 voted 6-1 to proceed with what’s known as a pendency plan, a day-to-day budget that allowed the city to operate while its petition for bankruptcy was pending.

The plan includes suspension of bond payments, claims and long term debt paid out of the general fund.  It also jettisoned labor contracts to reduce costs, including cuts to pay and benefits.

The most controversial was ultimate elimination of city contributions to retiree medical insurance.

“We are extremely disappointed that we have been unable to avoid bankruptcy,” said Mayor Ann Johnston.  “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens.  We will emerge from bankruptcy with a solid financial future,” she said.

In addition, the city will ask the court for permission to make public the information from the confidential mediation process.  The city negotiated for 90 days with its top 18 creditors in hopes of winning concessions and staving off the bankruptcy.  The talks failed, leading to the council’s vote Tuesday on the pendency plan.

Papers filed with the court listed the city’s 20 largest unsecured creditors, including the California Public Employee Retirement System, at $147.5 million; Wells Fargo Bank for pension obligation bonds, parking garage bonds and a variety of other bonded debt totaling $256 million; the Howard Jarvis Taxpayers Assoc. $31.5 million; $124.2 million and loans from the state of California for a marina $10.8 million.

The city has made cuts of $90 million to its budget in the last three years but still found itself $26 million short as a new fiscal year is about to begin July 1.

The council has cut nearly half the city staff, 25 percent of the police department and 30 percent of the fire department.  But it simply wasn’t cutting fast enough to keep up with growing debts and falling income.

The largest problem for the city is $416 million in unfunded retiree health care programs, according to city manager Bob Deis.

The city was caught in the midst of a mortgage market crash, when it had relied heavily on the revenues from home construction.  With the recession came job losses, foreclosures and a significant reduction in revenue.

Johnson pointed out during Tuesday’s meeting that even if the housing market begins to recover, the city will not see significantly increased income for years because Prop. 13, the property tax limitation law of the 1970s, limits property tax increases to 2 percent per year.

The resale of homes at significantly lower values means less property tax collection.

Case:  City of Stockton, No. 12-32118

Photo:  Trialinsider

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