The Chapter 9 Municipality Bankruptcy of the California City of Stockton occurred in June, 2012. Unfortunately, it may soon have more company, the primary reason is that cities across America created big promises to their workers (primarily police and firemen) during the good times when housing prices and the economy were surging. The problem now is that Stockton’s tax revenues (primarily from property taxes) have plummeted and the previous promises cannot be kept without forcing the city into a big fiscal deficit.
Stockton could not avoid the filing of bankruptcy due to a June 25th, 2012 due to million dollar gaps in its budget. They had already slashed the police force 25% and the fire department by 30% but this is not enough to make up the gap.
Therefore, a Chapter 9 municipality bankruptcy was the only option remaining because it can be a tool to cut Stockton’s retiree medical program, which faces a $417 million liability. The reduction of payments to employee pension plans appear to be off the table because of the high likelihood of a long and protracted legal battle with employees.
The aftermath of the bankruptcy has been grim. In fact, it took until April, 2013 just for Stockton to be able to be certain that they could stay in the bankruptcy when the judge determined that the city was insolvent. Now, unfortunately, there will also be a big battle in regards to which creditors will be paid back and how much. The biggest battle will likely be between CalPERS, the California retirement system, and Wall Street creditors and other private creditors who think that they should not be slighted in favor of more money going to CalPERS.
In the meantime, crime is up in the city and even basic city services have been slashed severely. There just doesn’t seem to be an end in site for the city of Stockton.
The bankruptcy lawyers for Stockton are the same lawyers who represented the city of Vallejo, California in 2008. The significance of this is that it there was no attempt made to reduce employee pensions in that case as well.
Legislation that allowed for cities to file bankruptcies was passed during the trying times of the Great Depression and was upheld by the Supreme Court in United States v. Bekins, 304 U.S. 27, 54 (1938). Unfortunately, as this country continues down this economic abyss of declining housing prices and fiscal imbalances, Chapter 9 bankruptcy will likely be introduced more and more into the vocabulary of the average American. If you need more information about bankruptcy, contact a Bankruptcy Lawyer near you.
Source: MSNBC, “Stockton bankruptcy likely to be costly mess,” Jim Christie, June 22, 2012