Stockton declares bankrupty. What next?

150 150 Cheryl Getuiza

It’s official. Stockton’s city manager filed to the U.S. Bankruptcy court in Sacramento just before 5 p.m. Thursday night, just two days after the city council gave the go ahead.

“We are extremely disappointed that we have been unable to avoid bankruptcy. This is what we must do to get our fiscal house in order,” Mayor Ann Johnston told the Los Angeles Times.

Stockton becomes the largest city in America to file for Chapter 9, but it’s not the first.

What can the city expect now?

“If any other chapter 9 cases are any indication, there will be a good set of litigation with people or organizations they owe money to,” said Samuel Bufford, former U.S. Bankruptcy Judge in Los Angeles.

In fact, a bunch of Wall Street bankers, Stockton city attorneys, union representatives and other creditors held closed door meetings in Sacramento to argue about the city’s fate.

Such mediations are confidential but a bankruptcy judge could lift the gag order, letting anyone owed money, to speak to one another.

Stockton city leaders must now use this time, while in bankruptcy, wisely by “dealing with its financial problems” and by figuring out how to better handle their budget to ensure not going down the same path.

With the city in such turmoil, what can the 300,000 plus residents in this port city expect? Brace yourself folks. It’s hard to imagine things getting worse. But they will.

“City services may be cut substantially, including no street repairs. This will have an effect on small businesses because if the roads aren’t fixed people won’t want to come down to that area.”

You’ve heard of the saying, things will get worse before they get better? This is it Stockton. This is your worst case scenario, but there is light at the end of the tunnel. 

The city of Vallejo filed for Chapter 9 bankruptcy in 2008. It took them three years to get out of the hole.

“It won’t necessarily take Stockton this long to get out of it, it just depends on the willingness of creditors to accept solutions or deals to their financial problems, “ said Bufford.

Is this an ugly trend? Perhaps. Mammoth Lakes and Montebello are looking into the same option.

“The problem up and down California with city and county governments, is those elected officials promised enormous pensions to city employees that they cannot afford. Part of the problem was economies were booming and unions, locally were strong. Those unions elected their friends into positions who then, in turn, voted to increase pensions. We are now seeing the effects,” said Bufford.

In fact, the city of Los Angeles, came close a few times, “around 97-98, then again around 2003-2004.”

The lesson here? If you don’t think this will happen in your city or county, you may be wrong. Get involved, figure out where the money is going and if your area is in trouble financially.

For now, all eyes are on Stockton as we sit and wait how this all plays out.


Cheryl Getuiza

All stories by: Cheryl Getuiza