Stockton Council Cashes in its Chips: Approve Plan to Seek Bankruptcy Protection

As expected, the city of Stockton will become the largest city to file for bankruptcy in American history after the council voted this week to proceed with a plan to file Chapter 9 bankruptcy. The mediation period with creditors officially came to an end on Monday but discussions didn’t allow the city to avert this outcome, as they could not obtain a comprehensive set of agreements sufficient to close the budget gap of $26 million. City officials have tried to put a positive spin on the bankruptcy, describing it as a way to restructure and come out of bankruptcy with a stronger, healthier and sustainable future, with the city manager pointing to examples like American Airlines and General Motors. Only Councilman Dale Fritchen opposed the plan, as he has been a vocal opponent of bankruptcy and has cautioned that an alternative could be available.

The city will default on $10.2 million in debt payments and cut $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. Retiree health coverage will be slashed this year and it could be eliminated next year, which has left many retirees frustrated and upset. The impact on city workers and retirees is covered here.

On Tuesday the council adopted a pendency plan that will outline the day-to-day operations of the City while in bankruptcy, including what expenditures will be reduced or suspended. So what exactly are the details of the pendency plan? The plan will be comprised of the following: suspending payment of bonds, claims and long term debt paid by the General Fund; shifting some funds to other sources; modifications to terms of labor and employee agreements that reduce costs; more employee salary and benefit reductions, including reduction and ultimately elimination of City contributions to retiree medical insurance.

Mayor Ann Johnston commented, “This is the most difficult and heart-wrenching decision that we have ever been faced with. We must take this action to protect the health, safety and welfare of the entire City and begin the recovery process.”

The city also plans to file a motion with the courts to share information from the confidential mediation process. City Manager Bob Deis noted that “While we did not meet our financial goals through the mediation process, we hope that what we did achieve will help us to exit from bankruptcy quickly. We are still negotiating with some creditors. We will honor tentative agreements reached during the additional negotiations, and we will continue to talk with our creditors.”

So can one expect Stockton’s bankruptcy to weaken the municipal-bond market? According to Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors, the answer is probably not, as Fabian stated, “There’s been enough talk about municipal bankruptcy and worries about it that when one actually happens, it’s a little beside the point. It’s hard to see one city’s faltering pushing the market weaker.” Additional coverage here.

Tips, Opinions and Feedback

Have feedback, comments or a opinion piece you'd like to submit?

Get in touch with us and see our opinion guidelines here