The Huffington Post reports that the next city in line to declare bankruptcy will be Stockton, California. Reports indicate that mediation talks with creditors have failed, and Stockton is set to become the largest city in the United States to declare bankruptcy.
The city had been discussing options to restructure their debts for months, which has escalated to hundreds of millions of dollars, but according to City Manager Bob Deis, the negotiations broke down on Monday despite the talks with creditors for the last three months.
“Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency,” Deis said at a City Council meeting.
It is expected that city lawyers will file for Chapter 9 Bankruptcy as early as next Wednesday. This action would allow the city to deal with the expected $26 million dollars of a budget shortfall for next year.
City officers in this port city of 290,000 have aggressively sought to avoid bankruptcy. In fact, over the last several years as property taxes plummeted they reduced the police force, the firemen, and wages and medical benefits.
These cuts were not enough, and the city officials begin to investigate whether Chapter 9 Bankruptcy would allow them to further cut debts and promised medical and retiree benefits while retaining the most critical services within the city.
Former city employees have fought back. In a standing room only meeting on Tuesday many retired workers argued that medical cuts for retirees could be devastating. City officials, however, countered that without the aggressive actions of bankruptcy the budget shortfalls could eventually lead to a chaotic situation.
A court must approve Stockton’s bankruptcy plan. Creditors would be paid in the order determined by the court from the general fund. The city would be allowed a certain amount of funds to function.
Critics argue that bankruptcy is never a fix all. Bankruptcy will not solve all of Stockton’s problems: loss of revenue from the housing crash, high unemployment rates, high home foreclosures, multi-year labor contracts with high retirement benefits, and expensive investments in failed business ventures such as a sports arena.
Proponents of the move to file bankruptcy, however, cite Vallejo, California, which filed for bankruptcy in 2008. Deis argued that, “Vallejo is leaner, smarter and they’ve got the confidence of their citizenry. I think Stockton will be doing the same.”
Municipal bankruptcy has historically been a rare phenomenon. Cities officials in the past may have seen filing bankruptcy as an admission that they failed at their jobs, and some states have laws which bans the practice.
The New York Times has reported that as more cities make the decision to file bankruptcy it could negatively affect the municipal bond market. How many towns, cities and counties have filed for bankruptcy protection in the last 30 years? According to one bankruptcy lawyer there have been less than 250. This trend seems to be changing, however, and experts agree that Stockton is it is unlikely to be the last city which considers this option to solve their debts issues.
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