Stockton to Become Largest City in U.S. to Declare Bankruptcy

Wednesday, June 27, 2012


The city of Stockton failed to reach a deal with its creditors Tuesday, setting the stage for the largest U.S. municipal bankruptcy in history.

The Stockton City Council voted 6-1 Tuesday night to halt bond payments, whack its employee health and retirement benefits and move forward with bankruptcy proceedings as City Manager Bob Deis said, “We think Chapter 9 is the only choice left.”

The city had been participating in a mediation process since March dictated by a new California law, AB 506, that sets the terms for municipal bankruptcy. Stockton, a city of 300,000, has been mired in debt since the economic bust in 2008 left it with the nation’s second-highest foreclosure rate and second-highest rate of violent crime in the state. It has been trying to plug an anticipated $26 million budget hole.

The mediation law, called by some “Death by a Thousand Meetings,” requires that blame for the bankruptcy be established at some point, virtually guaranteeing that there will be ongoing investigations into any allegations of corruption or incompetence. The city has fought to avoid bankruptcy the past three years by reducing its police department 25% and its fire department 30%. It cut pay and benefits for all city employees and reduced its General Fund expenditures by $90 million.

The river port city took advantage of the boom years preceding the bust to build a promenade, a sports arena and a hotel, while giving multi-year contracts to city workers with generous retirement benefits. Last year Forbes magazine named Stockton America’s Most Miserable City for the second time in three years. Eight California municipalities made the list of 20 cities. Stockton was supplanted at the top in 2012 by Miami.

Stockton residents like to point to Vallejo—a city of 120,000, just 30 miles northeast of San Francisco, that emerged from a 2008 bankruptcy in mid-2011—as an example of how a city can overcome its difficulties. But that city is still wrestling with pension obligations and depleted city services.   

A number of questions still remain as to what course Stockton will follow and what its bankruptcy might mean for other beleaguered communities as anxious public pension trustees and bondholders look on. State and local governments have $3 trillion in municipal securities outstanding, with an estimated $1 trillion of this being general obligation debt. State and local pension systems also have estimated unfunded liabilities as high as $2 trillion.  

–Ken Broder    


To Learn More:

Stockton to File for Bankruptcy, Will Be Largest U.S. City to Fail (by Diana Marcum, Los Angeles Times)

Stockton Declares Bankruptcy (Stockton Record)

In Vallejo, Bankruptcy Scars Still Visible (by Bobby White, Wall Street Journal)

Stockton, California’s Debt Problems May Set Precedent (by John E. Petersen, Governing)

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