Stockton and Hercules Hoping to Avoid Joining Vallejo In Bankruptcy

March 7, 2012

Hercules.jpgMany Cities and Counties throughout Northern California have been struggling in the recession as revenue has fallen. The City of Vallejo filed for bankruptcy to reduce expensive overhead costs including retirement packages for city workers. The City of Vallejo bankruptcy has provided Vallejo with an opportunity to manage its expenses and operate in the black again. The city of Hercules has also been contemplating bankruptcy, but it may no longer be at risk of a municipal bankruptcy after settling a lawsuit by bond insurer Ambac Assurance Corp, according to a report from the city's manager this week on the city's website. The settlement was expected to be approved this week.

S&P put Hercules' A-rated series 2010 debt secured by sewer utility revenues on review for a possible downgrade. The ratings agency's actions were prompted by the possibility of bankruptcy discussions at the Hercules City Hall and by a lawsuit filed by Ambac' Assurance Corp against Hercules. Ambac filed the lawsuit to force Hercules to use $4.1 million of tax-increment revenue collected in December by its now defunct redevelopment agency for a $2.4 million bond payment that was due last month.

Hercules did not use the funds because it keeps its money in a pooled cash account, which was running too low for the city to make the debt-servicing payment and pay for its operations at the same time. Hercules defaulted on the payment, which was covered through bond insurance.

S&P this week also lowered its issuer credit rating on Stockton to a selective default level of 'SD' from 'CC' after the financially troubled city missed some debt service payments due on March 1. The cut followed a downgrade by S&P last week in which it dropped its issuer credit rating on Stockton further into speculative grade territory to 'CC' from 'BB' after the city's leaders voted to suspend about $2 million in payments on some of its lease revenue bonds. Suspending the payments is part of a plan to restructure Stockton's finances to avert bankruptcy.

Stockton's revenue has tumbled in recent years because of the declining housing market and two decades of fiscal mismanagement according to Stockton's city manager. Stockton has indicated that it intends to bring its major bond holders, bond insurers, employees and retired employees into mediation for up to ninety days. A new state law approved after Vallejo's 2008 bankruptcy requires mediation for financially troubled local governments entertaining bankruptcy. The city aims to obtain concessions in the face of a budget shortfall of approximately $20 million.

If Stockton does not obtain necessary concessions it will still have the option to declare bankruptcy, which would make it the biggest U.S. city to do so. If you are a city, county or governmental entity contemplating bankruptcy, you should seek legal advice. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.