Amidst the hullabaloo over Obamacare, the contempt charges against Attorney General Holder, staggering news came out of the northern California city of Stockton which became the largest city to file for bankruptcy in U.S. history on Thursday. After years of financial mismanagement and the crash of the housing market, the city has been left unable to pay for city services, retiree pensions and the value of the city’s bonds has dropped to junk bond status.

Stockton, California Bankruptcy

The city of Stockton has spent the last three months negotiating with creditors in an attempt to avert bankruptcy, but the depths of the city’s fiscal crisis was far more severe than the creditors initially realized. Unable to secure relief from the growing debt, the city of 300,000 people petitioned the federal court to for Chapter 9 bankruptcy protection.

“We are now a Chapter 9 debtor,” Marc Levinson, the lawyer who filed the city’s voluntary petition in the Eastern District of California, in Sacramento (Case 12-32118) told Reuters News Service.

Friday Levinson filed pleadings to verify Stockton’s eligibility for Chapter 9 bankruptcy.

While Stockton is the largest U.S. city ever to file for Chapter 9 protection, there has been a raft of municipal filings over the past several years, including some other notable cities.  Last year Harrisburg, PA, became the first state capital every to seek protection, filed Chapter 9 bankruptcy when the city administration found itself more than $458 million in debt.  The county of Boise, ID filed bankruptcy several months earlier and another California city, Vallejo, sought federal protection in 2008.

The California Public Employees’ Retirement System, which manages Stockton’s pension plan, tops the list of creditors. The retirement system has a $147.5 million claim for unfunded pension costs.

Other top creditors include investors holding $124.3 million of Stockton’s pension obligation bonds, $40.4 million of the city’s variable rate demand obligations, $35.1 million of the city’s public facilities fees bonds and $31.6 million of the city’s parking garage debt.

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

Stockton’s negotiations with creditors ended on Monday after failing to win enough concessions to help close its budget shortfall for the fiscal year starting on July 1.

The Chapter 9 bankruptcy filing, once a rare event for U.S. municipal debt issuers, has become far more prevalent in recent years, was left as the only option for Stockton to reduce the $26 million deficit for the city’s new fiscal year.

A new budget, approved on Tuesday by Stockton’s city council, suspends $10.2 million in debt payments, cuts city employee compensation and retiree benefits by $11.2 million to help close the deficit.

Retiree medical benefits will eventually be eliminated; however Stockton plans to leave its public pensions unchanged during bankruptcy proceedings.

Stockton City Manager Bob Deis said they had run out of options to balance the city’s budget after deep cuts in recent years to Stockton’s work force. Further cuts to the city’s police department have been rejected due to a surge in violent crime.

Stockton defaulted on $2 million of their debt earlier this year, allowing the trustee for one of its bond insurers to seize a building once slated to be the future city hall along with three parking garages.

“We need to spread the pain. What’s left are creditors, our bondholders and retirees,” Deis said.

The city is the victim of uncontrolled spending during a time when the state encountered sharp decreases in real estate tax revenue forcing cuts of more than $90 million in spending in recent years.

The housing boom the city experienced during early last decade collapsed putting Stockton at, or near, the top of national foreclosure rankings in recent years.

Though Stockton has become the nation’s most populous city to file for Chapter 9 bankruptcy, Jefferson County, Alabama, remains the biggest municipal bankruptcy in terms of outstanding debt, with more than $4 billion above the county’s projected revenue when it filed in 2011.

Standard & Poor’s ratings services downgraded Stockton to junk bond status on Wednesday, and Moody’s Investors Service followed shortly thereafter placing Stockton in the “substantial risk” category.


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