Fitch: Stockton Bankruptcy Likely To Affect Future Municipal Bankruptcy Negotiations

A new analysis asserts that court approval of Stockton, California’s plan of reorganization under Chapter 9 of the bankruptcy law could have far-reaching implications for future municipal bankruptcy cases, particularly with regard to labor negotiations.

Fitch Ratings recent report, “Stockton Bankruptcy Perspectives,” discusses the ways in which negotiations among labor unions, employees, bondholders, and taxpayers – who are all being asked to contribute to the city’s recovery – will affect negotiating power among bankruptcy creditors in the future. According to the report, their examination reveals that, in future bankruptcy cases, municipal workers who are protected by union contracts may experience more challenges in seeking priority repayment status over other creditors. This is the struggle that is currently being played out in the Detroit bankruptcy case, and Fitch notes that the outcome of Stockton’s reorganization struggle could affect the future negotiating power of labor unions and other employee creditors.

“Stockton’s ability to achieve significant concessions from labor under threat of bankruptcy provides food for thought about incentives in other potential cases,” said Amy Laskey, Fitch managing director. “The specter of bankruptcy may have motivated labor, although not bondholders, to negotiate.”

Laskey may largely be referring to Stockton’s elimination of post-employment benefits, which were negotiated in the past with current employees and retirees.

Stockton is currently the country’s second-largest city to seek Chapter 9 municipal bankruptcy protection – following Detroit – but it is making headway in exiting bankruptcy. The city’s voters recently approved a ballot measure to raise Stockton’s sales tax to 9 percent. The increase will allow the city to generate roughly $28 million annually, enabling it to restore public services, cover the cost of law enforcement needs, and take it a step closer to emerging from bankruptcy.

Kathy Miller, a Stockton council member, recently told Bloomberg that the measure would help the city enter “recovery mode.” Without the approved legislation, Stockton would have been forced to implement more service cuts, including the elimination of the city’s library system, community center programs, and an additional 14 percent cut in the fire department, she told the news source.