Stockton Bankruptcy

March 28, 2012
By Scott D. Schwartz from Rust, Armenis & Schwartz on March 28, 2012 10:07 AM

Stockton.jpgCities and counties and other governmental entities continue to struggle in Northern California as a result of the economy. Stockton continues in a slide toward Chapter 9 bankruptcy. Stockton has been forced down the Chapter 9 bankruptcy path because of soaring retiree costs, accounting errors and the weight of the recession.

Stockton faces a budget gap in the range of $20 million to $38 million, the result of a steep plunge in revenues due to a severe local housing slump. According to Stockton's city manager, the city's finances are also at the breaking point due to two decades of fiscal mismanagement by city officials and because the city took on too much debt and provided overly generous pay and benefits for municipal employees and retirees.

Stockton recently had its pension-obligation and lease- revenue bond ratings cut by Moody's Investors Service on about $341 million in debt. Moody's lowered Stockton's 2007 pension-obligation bonds to B3 from B1 and reduced the 2006 lease-revenue bonds to Caa1 from B2. The ratings are six and seven levels below investment grade. The action reflects the growing likelihood of default and the potential for less than 100 percent recovery for bondholders as the city continues down the path of mediation and potential bankruptcy according to Moody's Investors Service.

On February 28, 2012, the Stockton City Council agreed to comply with a new California law enacted in response to the City of Vallejo bankruptcy that requires cities to negotiate with creditors before seeking Chapter 9 bankruptcy. The City Council also decided to default on about $2 million in debt payments during the remainder of the current fiscal year through June 2012.

As a result of the Stockton City Council vote to negotiate with creditors, a former U.S. bankruptcy court judge has been selected to oversee the negotiations between Stockton and its creditors to avoid having to file for bankruptcy. Ralph Mabey, was selected as the mediator by Stockton officials and those invited to the negotiations. Ralph Mabey served as a U.S. bankruptcy judge from 1979-83. The following will join the mediation along with city bargaining units and a group representing retired city workers: Assured Guaranty; the California Public Employees' Retirement System; Dexia Credit Local, New York branch; Franklin Advisers Inc; National Public Finance Guarantee Corp; Union Bank; the U.S. Department of Housing and Urban Development, and Wells Fargo & Co. The mediation may last up to 90 days and is intended to give Stockton an opportunity to seek concessions to solve its budget crisis. If Stockton is unable to win sufficient concessions, it could still file for Chapter 9 bankruptcy and it will become the biggest U.S. city ever to do so.

If you are a city or county or other governmental entity having financial difficulties you should consult with an attorney. We provide advice regarding bankruptcy throughout Northern California. We provide 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.