Stockton, Calif., ready to file largest city bankruptcy

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STOCKTON, Calif. -- After desperately trying everything from huge budget cuts to secret negotiations with creditors, the Stockton City Council finally ran out of options Tuesday night and was set to take an action no other city its size has taken: It was voting for bankruptcy.

The vote was to authorize a day-to-day operating budget, called a pendency plan, that will take effect if city officials formally file for Chapter 9 bankruptcy protection in federal court in Sacramento. That filing is expected today.

Stockton, a river port with 292,000 residents, was set to becoame the biggest city in U.S. history to vote itself into bankruptcy. The previous largest bankrupt city was Vallejo, Calif., which filed in 2008 and resumed solvency last year.

A federal judge would be charged with deciding how much money on the dollar Stockton would pay creditors, and how the city would restructure its budgets in the future.

Bankruptcy became the only option after the city failed to erase a $26 million deficit or to renegotiate millions of dollars it owes in retiree health benefits and on huge civic projects it built in the past decade.

Tuesday's meeting was tense, and hundreds of people gathered in the council chambers and two overflow rooms. City retirees whose benefits would be cut clapped loudly as speaker after speaker denounced city leaders as "tyrants" and "incompetent."

Mayor Ann Johnston vainly ordered the crowd to be silent.

Retired police Officer Nicholas Huerta, 57, said he won't be able to afford his medical insurance if the city reduces its $1,500 monthly contribution. "I don't see how they can go back on their promise, but I guess they feel they can do whatever they need to," he said bitterly. "I planned my retirement around that medical insurance, and now they pull the rug out from under us."

The benefits and civic projects, including a new arena and City Hall, were developed during the boom years of the early 2000s. But after the national housing collapse that began around 2008, property tax and other revenues dried up.

While the city has cut $90 million from the general fund over the past three years -- reducing the police force by 25 percent, fire department by 30 percent, and general city staff by 43 percent -- it still wasn't enough.

Three months ago, the city entered closed-door negotiations with 18 labor organization, bondholders and retiree groups to try to reduce costs and avoid bankruptcy. The secret talks were the first test of a new state law, AB 506, that requires municipalities to try mediation with creditors before filing for bankruptcy.

The deadline for those talks to end was midnight Monday. Lack of a resolution set up Tuesday's council vote.

"We've got to clean up years and years of poor management, and this City Council has been making the tough decisions to do that," said City Manager Bob Deis. "That's why I think, ultimately, Stockton's future will be much better than it appears in the short term. They are going to continue making courageous decisions."

The council earlier this month authorized Mr. Deis to make the bankruptcy filing, but Tuesday's pendency plan vote was necessary before he could do that.

Mr. Deis said most Stockton residents wouldn't notice any big changes under bankruptcy. Some costs, such as parking tickets, would likely rise, but the brunt of the immediate effect would be felt by retired city workers, whose lifetime health plans would be slashed, and bond holders and other creditors, who would be in line for reduced debt payments.

San Francisco bankruptcy attorney Karol Denniston, who helped write AB 506, said the failed 90-day mediation process may actually help the city and its creditors in the long run.

"Even if they didn't find resolution, at least they started the negotiations that will now continue in court," she said. "It's going to make the whole thing more streamlined. It wouldn't be unreasonable for Stockton to emerge from bankruptcy in 18 to 24 months, depending on what progress they made in the mediation."


First Published June 27, 2012 12:00 AM


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