Stockton becomes most populous US city in history to declare bankruptcy

150 150 Cheryl Getuiza

Stockton did not pass Go and was not allowed to collect $200 (photo: Flickr/Mercury81)

It’s official! A U.S. Bankruptcy judge has given the green light for the city of Stockton to enter into bankruptcy protection, making it the most populous city in the nation to do so.

“It’s very sad to see. One would hope there would be better solutions to the local revenue problems,” said Samuel Bufford, a former U.S. Bankruptcy Judge in Los Angeles. “In this case, the judge considered the evidence and decided that Stockton’s case should move forward. Under U.S. law, a case going forward means that the financial difficulties are serious enough that relief under bankruptcy code is appropriate.”

The city of 300,000 had accumulated a debt of about $1,032,000 dollars, according to paperwork filed June 2012.

Many say ballooning salaries, benefits and borrowing based on anticipated long-term developer fees and increasing property tax revenues were factors that put the city into financial ruins. The housing bubble was also a big problem with an unforeseen amount of foreclosures. 

“Proposition 13 is a big factor. It is old but one of its long-term consequences has been to remove the business sector from the property tax base so that the property tax is born almost exclusively by residential homeowners. It also ties the hands of local communities in adjusting those taxes to meet the needs of revenue for the local government. But probably the bigger factor is the impact on the tax base. The impact is cumulative it gets worse and worse as the economy develops and as time goes by,” said Bufford.

For obvious reasons, the city’s creditors wanted to keep Stockton out of bankruptcy wanting their debts to be paid in full.  

“The bond holders tried to stop this,” said Fred Silva, Senior Fiscal Policy Advisor at California Forward. “Now the city is going to settle in a lengthy process through bankruptcy courts and will involve all of their creditors.”

One of the major debts unsettled: The hundreds of millions of dollars the city owes to the California Public Employees’ Retirement System to cover pension promises.

“It’s a huge factor in the state of California. Many municipalities, government entities, have promised huge retirement benefits to their retirees that they have not funded and failure to fund retirement benefits is a huge recipe for trouble,” said Bufford.

The U.S. Bankruptcy judge has not decided the question of whether the city must renegotiate its 

The city of Vallejo filed for Chapter 9 bankruptcy in 2008. It took them three years to get out of the hole, but it appears the city has reorganized and is headed down a better road.

“Now the city of Stockton is headed down the same course as the city of Vallejo took in order to get itself restructured,” said Silva.

“One can’t predict that the outcome will be similar but one can predict that a lot of the factors will be the same. A lot of the issues, will be the same, how they will be resolved really depends on the parties getting together and figuring it out,” said Bufford.

Could yet another California city be headed on the same path? San Bernardino filed for Chapter 9 bankruptcy in August 2012.

“A judge has not ruled on that case yet, but it’s more likely to have an impact if the judge decides the bankruptcy case was properly filed. Factors are unique to each city, to each Chapter 9 debtor. One of the requirements is that, before they filed, they must have made a good faith effort to resolve their financial problems and because the financial problems are different form one case to another, how they try to resolve it differs from one case to another,” said Bufford.

All eyes are on the city of Stockton and all parties involved.

“These are business problems that need negotiations and business solutions and the bankruptcy law doesn’t solve those questions, it creates a forum where it makes it easier for the parties to come together to come up with a solution,” said Bufford.


Cheryl Getuiza

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