Bloomberg News

Stockton Bankruptcy Is ‘Inevitable,’ Union Lawyer Says

May 31, 2012

Negotiations between Stockton, California, and its creditors won’t yield enough savings to keep it from becoming the largest city to seek bankruptcy protection, a lawyer for an employee union said.

While Stockton has negotiated in good faith with its creditors, including unions, there’s little chance of a deal that would save the agricultural city of 290,000 enough money to avoid insolvency, Joseph Rose, attorney for the 385-member Stockton City Employees Association, said today by telephone.

Stockton’s city manager may be granted authority to seek bankruptcy protection in a City Council vote scheduled for June 5, moving one step closer to a fate officials have sought to avoid.

“I don’t see this as a bargaining tactic by the city,” Rose said. “I do see bankruptcy as an inevitable fact of life in this process. It doesn’t have to do with tactical considerations by the city or anyone else.”

The farming center about 80 miles (130 kilometers) east of San Francisco has been holding confidential talks with creditors to escape becoming the largest city to enter court protection in U.S. history.

Communities and states across the U.S. face soaring costs for pensions and retiree health benefits even as sales and property-tax revenue was depressed by the longest recession since the 1930s. The problems have been compounded in Stockton by accounting errors that left the community of about 292,000 residents almost insolvent.

‘Remain Hopeful’

“We remain hopeful that we can reach an agreement with a sufficient number of our creditors to get our fiscal house in order,” Mayor Ann Johnston said yesterday in announcing plans for the vote. “Without significant fiscal relief, the general fund will be out of money by June 30.”

The talks with creditors, aimed at reaching an agreement under state-required mediation, have been extended until June 25. California mandates the adoption of municipal budgets by July 1. Stockton faces a $26 million deficit in the coming fiscal year.

The City Council met May 15 to consider options for balancing the spending plan that included a Chapter 9 bankruptcy filing, massive cuts to city departments or concessions that might emerge in talks with a mediator.

‘Tighten the Belt’

“The city needs to tighten the belt and start crawling our way out of this hole,” City Manager Bob Deis said at the meeting. Bankruptcy is an option only if the talks fail, he said at the time.

Deis’s bankruptcy proposal marked the first time since February that city officials offered the idea of pursuing court protection after previously saying they wanted to avoid it.

The California Public Employees’ Retirement System, the largest U.S. public pension, and San Francisco-based Wells Fargo & Co. (WFC:US), the nation’s largest home lender, are among 18 creditors that are negotiating with the city. The negotiation period began March 27 when the participants chose a mediator to guide the talks.

Stockton’s financial practices and reporting are the subject of a state investigation with the goal of better understanding the city’s fiscal situation, California Controller John Chiang said last month.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Alison Vekshin in San Francisco at avekshin@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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