After three years of struggling to overcome housing and economic woes, Stockton, California, buckled under financial strain and filed for Chapter 9 municipal bankruptcy. Stockton is the largest city in history to file for protection under bankruptcy law
The city’s financial troubles began in 2008 after it approved generous retirement benefits packages and began construction on several projects to beautify the town. The foreclosure crisis took its toll on the town after the economy collapsed and the city’s property tax revenue plummeted.
The town filed for protection in a U.S. Bankruptcy Court in Sacramento last week, after the City Council approved a pendency plan that would allow it to pay its minimum bills during the bankruptcy process. In addition, the budget also includes an order to stop bond payments and cut employee health benefits and pensions. The town currently faces a $26 million budget gap and nearly $1 billion in long-term debt.
“We are extremely disappointed that we have been unable to avoid bankruptcy,” Mayor Ann Johnston said in a statement announcing the filing. “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens. We will emerge from bankruptcy with a solid financial future.”
Some bond insurers, namely Assured Guaranty, which has $161.4 million of insured exposure to the town, has said it will fight Stockton in the court systems to find another avenue to bankruptcy. Although Stockton participated in a mandatory three-month mediation session with bondholders and creditors, the parties involved were unable to reach a consensus on a strategy to close the budget gap by the June deadline.