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Categorized | Capital Markets

Californian city of Stockton files for bankruptcy

Posted on June 29, 2012

The California city of Stockton has filed for bankruptcy protection after failing to cut deals with creditors over crippling labour and borrowing costs, the largest bankruptcy of a US city in decades.

“Our general fund resources are depleted and we cannot allow the city to spiral into uncontrolled default,” said Bob Deis, city manager on Thursday. “Bankruptcy stops a barrage of lawsuits and allows the city breathing room while working toward a plan of adjustment and moving Stockton forward.”

    Under the plan adopted by the city council on Tuesday, the city will suspend payment on bonds, cut the salary and benefits of municipal employees, end contributions for retiree’s medical insurance and modify labour agreements.

    The city however said that its residents will not see any changes in services from the plan and pledged to continue to pay workers and vendors on time.

    “We are extremely disappointed that we have been unable to avoid bankruptcy,” said Mayor Ann Johnston. “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens. We will emerge from bankruptcy with a solid financial future.”

    Stockton’s financial woes stem from a decade of over-borrowing and overambitious revenue projections based on a housing boom that went bust with the foreclosure crisis in 2009.

    The city, with a population of 300,000, faces $319m in outstanding debt, plus $450m in health insurance and pension liabilities for city pensioners. It forecast a $26m deficit in the budget for the next fiscal year, starting on Sunday.

    It was the first to turn to a new California law, AB 506, which allowed the city to pursue professional mediation with its creditors to reach an agreement before going to a bankruptcy court.

    Stockton is the largest city by population to file for Chapter 9 since at least 1960, according to James Spiotto, a partner at the law firm Chapman and Cutler.

    There have only been 49 filings for cities, towns and counties since 1980, he said.

    Over the past few years, concerns have grown of rising defaults and bankruptcies for US municipalities as many areas remain squeezed by a fall in tax revenues after the recession and property bust at the end of the past decade.

    Jefferson County, Alabama, last year filed the largest municipal bankruptcy in terms of debt. But fears of sweeping local failures have yet to materialise. That has cheered the US municipal bond market, where states and local governments raise money, which has rallied in 2011 and 2012.

    Yields have fallen to historic lows in line with falling rates for US government bonds.

    Since the Great Depression, investors in the muni debt of cities have largely recouped their money even in cases of default and bankruptcy. Rating agencies Standard & Poor’s and Moody’s however both cut their ratings on Stockton’s debt on Wednesday following the city council’s vote for bankruptcy.