Featured News 2012 The City of Stockton Files for a Record Breaking Bankruptcy

The City of Stockton Files for a Record Breaking Bankruptcy

On February 24th, 2012, Stockton California made history when the city council was asked to file for bankruptcy. If they finalize this decision, they will be the largest U.S. city in the history of the nation to file for a Chapter 9. According to one politician, 635 municipalities have filed bankruptcy since 1937. Still, none of those towns have been as densely populated as Stockton. Stockton is known as a coastal farming center with approximately 292,000 residents. It is about 55 miles south of California's capital, Sacramento. The city is twice the size of Vallejo, California, which became a national symbol of distressed financial standings in 2008 when it sought protection from creditors.

According to the San Francisco Chronicle, the city of Stockton has been toting the burden of a $702 million long-term bond debt. This amount will only accumulate if not remedied. Up until now, the city has worked to resist bankruptcy by shrinking payrolls. In fact, the city mayor told Bloomberg that they are still trying to avoid "ultimate" bankruptcy if possible. The council even eliminated a quarter of the police in the city to drop some costs. This cut was risky; Stockton is listed as the eighth highest crime rate in the United States as well as the eighth highest in unemployment. The current employment rate in the city is 15.9 percent, which is more than twice the national average.

Forbes magazine has twice called Stockton the U.S.A.'s "most miserable city" because of their financial downfall. Last November, Moody's Investors Service downgraded $137.7 million of the city's debt to a Baa1, which is known as the third-lowest investment grade. Moody explained that they did this because of Stockton's very precarious financial position. The city manager asked his council to approve mediation with creditors, and they agreed on the measure 6-1. Most of these creditors are bond insurers and labor unions.

This mediation process is the first step required by California so that a city can seek bankruptcy. As well, the city manager will ask permission to resist $2 million of debt services which are allegedly due in March. That way, the city will be able to suspend cash payouts to employees for unused vacation and sick leave and then investigate into the causes for the city's financial disaster. Even if Stockton goes through with this bankruptcy, they will end up with a new expense, the roughly $20 million in projected legal fees. A city council member commented that even after the bankruptcy, the city will still need drastic budget cuts to accommodate for the legal fees and get back to financial stability.

The city chose a famous bankruptcy lawyer to help on their case, the same man who worked on the Vallejo case four years prior. This Vallejo case altered the way that city bankruptcy is conducted in California. For one, the Vallejo case changed laws so that cities are now required to work with a "neutral evaluator" for at least 60 days before seeking court bankruptcy protections. This process is like mediation and allows creditors a right to participate.

After 60 days, if the city and creditors cannot come to a resolution, then that municipality can seek court protection. The only way to bypass this important step is by declaring a fiscal emergency. Since 2010, Stockton has declared two financial emergencies because of the rising expenses of retiree health benefits and debt tied to economic growth. According to the city manager, bankruptcy is almost inevitable and there are no other alternatives. More service reductions, pay cuts for city employees or tax increases are not feasible, and Stockton will need to declare a Chapter 9 to survive.

Related News:

Control your Personal Debt with These Helpful Tips

The average credit card debt in an American household is $15,956. The Federal Reserve Bank of Boston says that 609.8 million creditors are held by U.S. consumers, and the majority of them are not paid ...
Read More »

Bankruptcy Basics

Debt is a slippery slope that can cause a great deal of emotional and financial stress. It can affect sleep, productivity, and family relationships. The good news is that bankruptcy can help people ...
Read More »

How to File for Bankruptcy with a Limited Liability Company

A limited liability company or LLC is a relatively new type of business that was created by the state. Because LLC’s haven’t been around very long, how to file for bankruptcy in an LLC is ...
Read More »