Stockton California To File Bankruptcy (UPDATED)
UPDATE: After 5 plus hours of meeting the City Council has votes 6-1 to authorize the filing of a Chapter 9 bankruptcy petition.
Said petition to be filed this week, most likely tomorrow.
The city council is still meeting to make it official but the city of Stockton will tonight authorize the filing of a Chapter 9 bankruptcy petition, most likely to be filed tomorrow or Thursday.
On the surface the filing will not seriously alter the day to day operations of the city. Under Chapter 9 bankruptcy the court does have overall jurisdiction of city finances but their actual powers are fairly limited. The real purpose of the filing is that the court has the power to approve changes in city contract and in particular in the terms of the bonds issued by the city.
But the filing will be another black spot on the city and will further erode the standing it has in the business and financial community. It will be much harder for the city to issue bonds in the future and it will not encourage businesses to invest in the area. Indeed it is likely the filing will cause ripple effects up and down the Central Valley, hurting the image of surrounding cities.
Of course Stockton is merely the tip of the iceberg, there are many other cities both in California and around the country that are in an equally bad position, Stockton just happens to be the first to reach the cliff.
One issue really pushing the filing is the fact that state law requires the city adopt a balanced budget by July 1st and the only way to do that (now that negotiations with creditors have failed) is to file for Chapter 9 bankruptcy protections.
I am hardly going to defend the city government, they made a lot of very dumb mistakes (like assuming that the good economy and good real estate market would go on forever) but they are also stuck between a rock and a hard place.
Two major mistakes got the city to where it is today.
First, during the real estate boom era the city wanted to do something to improve the downtown area, which like many downtown areas had become a real eyesore. Other cities had succeeded with redevelopment projects and Stockton does have one of the best inland deltas in the world, a perfect spot for a water recreation themed project.
They also worked to make much needed improvements on city hall and other municipal buildings. Again there was good logic behind the moves, the buildings were decades old and needed to be improved and they had some good opportunities with some downtown buildings.
The problem was that they took out long term bond debt to pay for it, assuming that revenues from both the downtown project and continued income from real estate taxes could sustain the debt. But Stockton was one of the epicenters of the real estate collapse and the already weak economy was badly hit by the recession.
As a result they are now in a position where bond debt cannot be serviced and there is not really any viable way to restructure bond debt outside the bankruptcy process.
The second major mistake was to offer very generous contracts to city employees. While the economy was booming this made sense but as the economy started to cool this made things harder. To make things worse, when they wanted to try and resolve the problem of these long term contracts they made deals with city workers to accept short term pay cuts in exchange for benefits like lifetime medical coverage.
In the short term this helped by reducing payroll costs but in the long term it simply provided for bigger obligations for a much longer period of time. Although negotiations did make progress in resolving these contracts they were not able to work them all out (and in fairness it is the job of the unions to push for their members) so the only way to resolve things is via Chapter 9 process
Rest assured this story will be around for quite a while and I will continue to update as it develops.