(Bloomberg News) Stockton, California, said it will file for bankruptcy after talks with bondholders and labor unions failed, making the agricultural center the biggest U.S. city to seek court protection from creditors.
"The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection," Stockton said in a statement released yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection. "In addition to the bankruptcy petition, the city will file a motion with the courts to share information from the confidential mediation."
The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided by the bankruptcy court. The city of 292,000 may file its petition as soon as today.
"It's a sad day in the city of Stockton," Mayor Ann Johnston said before the budget vote. "I see no other solution to this."
Municipal bankruptcies in the U.S., while still rare compared to corporate filings, became more common after the housing and financial crisis began. Ten of 42 cases filed since 1981 came in the past four years, according to court records.
The biggest municipal bankruptcy was filed last year by Jefferson County, Alabama, which is trying to restructure $4.2 billion in debt, most of which is tied to sewer bond deals tainted by corruption.
Vallejo Bankruptcy
Stockton's bankruptcy will probably resemble the 2008 case of another California city, Vallejo, which exited court protection last year, bankruptcy attorney Dale Ginter said. Both cities have been hurt by high labor costs, particularly health insurance for retirees, he said.
"Retirees are not going to be happy," said Ginter, who represented retired Vallejo workers in that city's bankruptcy. "My prediction is that retiree health care is cut. I wouldn't be surprised to see it cut to zero."
Bondholders and current employees will probably also have to take less, said Ginter, who has reviewed city financial reports.