Bloomberg News

Stockton Empowers Manager to Put City Into Bankruptcy

June 06, 2012

The Stockton, California, City Council voted to authorize a bankruptcy filing as soon as June 26 if officials fail to win concessions from creditors that would allow it to avoid becoming the biggest U.S. city to enter court protection.

The council, in a 6 to 1 vote, granted City Manager Bob Deis the authority to file for Chapter 9 municipal bankruptcy protection. The farming center, about 80 miles (130 kilometers) east of San Francisco, is approaching insolvency when its fiscal year begins July 1.

“We have hit the wall,” Mayor Ann Johnston said at the council’s meeting late yesterday. “There are no quick fixes, there are no silver bullets.”

Stockton faces a $26 million deficit in the coming year. Like cities and towns across the U.S., it’s been strained by soaring costs for pensions and retiree health benefits while sales and property-tax revenue plummeted after the longest recession since the 1930s. The decline of the city of 292,000 was compounded by accounting errors and large borrowings.

If the city seeks court protection, it would join Central Falls, Rhode Island, which entered Chapter 9 protection in August after failing to win union concessions, and Jefferson County, Alabama, which became the biggest municipal bankruptcy in U.S. history in November, with $4.2 billion in debt. Vallejo, California, entered Chapter 9 in 2008, emerging from the process last year.

Talks Extended

The talks with creditors, aimed at reaching an agreement under state-required mediation, have been extended until June 25. The City Council authorized Deis to file for bankruptcy protection once the talks end.

Marc Levinson, a bankruptcy lawyer with Orrick, Herrington & Sutcliffe LLP based in Sacramento, who represents Stockton, said he needs the time to prepare the filing.

“Preparing bankruptcy proceedings is not something that you can do in a day or in a week,” he told the City Council. “We have to be realistic. We can’t just wake up on the 24th and say, uh-oh, tomorrow is the day.”

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 participating in the talks. The negotiation period began March 27, when the participants chose a mediator to guide the talks.

Stockton’s council agreed to begin talks with creditors in a Feb. 28 meeting, when it also decided to default on $2 million in bond payments to conserve cash.

Repercussions

The city is already suffering the repercussions from its march toward bankruptcy. Moody’s Investors Service dropped its credit rating on some of the city’s debt to junk. After the city defaulted on some of its bonds, Wells Fargo sued to repossess an eight-story, bond-financed downtown building that was supposed to become city hall, as well as three parking garages also financed with debt.

Deis on May 15 laid out a plan for the city, including a Chapter 9 bankruptcy filing and cuts in departments. It marked the first time since February that municipal officials offered the idea of pursuing court protection after previously saying they wanted to avoid it.

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 in April.

California’s constitution requires cities to adopt a balanced budget by July 1.

To contact the reporter on this story: Michael B. Marois in Stockton, California, at mmarois@bloomberg.net

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


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