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Pew Law Center Blog
July 2, 2012 Lawrence 'D' Pew

Stockton Filing Biggest Chapter 9 Bankruptcy Ever

The inland port city of Stockton, California, located east of San Francisco and Berkeley, is filing for Chapter 9 protection under the U.S. Bankruptcy Code. With a population of 292,000, this makes Stockton the largest city to file for bankruptcy in U.S. history.

Mayor Ann Johnston’s city is insolvent; its general fund is in crisis. This is the aftermath of huge investments beginning in the 1990s to revitalize downtown, of an imploded housing market, and of a collapsed property tax base.

Stockton Adopts a Pendency Plan

In the Stockton city council’s official release, it announced adoption of a pendency plan to manage the budget and operate day-to-day during the bankruptcy proceedings. The city council approved the pendency plan in a six-to-one vote on Tuesday, June 26. “Adoption of the Pendency Plan assumes the city will file for protection under Chapter 9… before July 1.”

City manager Bob Deis’ pendency plan indicates where cost-cutting measures will be directed in anticipation of bankruptcy. The plan is focused on “restructuring of above-market pay and benefits and unsustainable long term debt.” Here is an overview of the city’s budget restructuring:

● Modify labor and employment contracts to lower costs.

● Reduce employee salaries and benefits.

● Reduce and then eliminate city contributions to retiree medical insurance.

● Suspend bond payments.

● Suspend legal claims.

● Suspend long term debt payments.

● Improve code enforcement and parking citations to increase revenue.

● Shift some funds to other sources.

The pendency plan is expected to suspend $10.2 million in debt payments and $11.2 million in retirement benefits. Bankruptcy is also widely expected to cause additional downgrading of Stockton municipal bonds. (Moody’s Investors Service dropped Stockton’s credit rating to junk level Ba2. Standard & Poor’s Ratings Services dropped its credit rating to SD, just above default.)

No Mediation Agreement Between Stockton and Largest Creditors

As discussed in our previous article on Stockton’s financial plight (read the Tale of Two Cities: Detroit and Stockton on the Brink of Bankruptcy), the city was poised to file for bankruptcy several months ago. However, California’s AB 506 legislation required mediation in advance of any bankruptcy filing.

The California law’s 60-day period for mediation between the debtor-city and its largest creditors was extended for an additional 30 days, but no agreement was forthcoming. After three months of negotiations, on Monday, June 25, the “mediation concluded without obtaining a comprehensive set of agreements sufficient to close the budget gap of $26 million.” 

The process of mediation is a confidential one. However, the city plans to motion the court for permission to release the debtor-creditor mediation details.

No More Shoes to Drop on Stockton Residents

Stockton’s residents have been waiting a long time for some kind of resolution to the debt crisis. The last shoe has finally dropped. The city’s bankruptcy may be historically significant, but for locals the place has been broke for some time. There is good news: the proposed budget in the pendency plan will not result in any noticeable diminution of city services.

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