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Stockton Gives City Manager Power to Declare Bankruptcy

Stockton Gives City Manager Power to Declare Bankruptcy

Stockton isn’t giving up on AB 506, but should the confidential mediation fail to realize significant savings by June 25, the city will have just three business days until it is general fund balances reach zero and the city becomes insolvent.

That’s why at Tuesday night’s City Council meeting, a majority of the council authorized the city manager to file for Chapter 9 Bankruptcy protection if AB 506 does fail. It wasn’t a vote for bankruptcy, it was a vote to prepare for a potential bankruptcy.

“We remain hopeful that we can reach an agreement with a sufficient number of our creditors to get our fiscal house in order,” said Mayor Ann Johnston. “However, we must have a plan for any possible outcome to protect the health, safety and welfare of our community and maintain basic services. Without significant fiscal relief, the General Fund will be out of money by June 30, 2012.”

While immediate deficits pose the greatest threat to the city’s solvency, the long-term implications of the city’s structural deficit continue to drive the city’s aggressive approach to cutting costs. According to the staff report produced by the city manager’s office, the “long term obligations approach $1 billion. Relief from such obligations can greatly improve the City’s viability.”

Contributing to that long-term imbalance are costs associated with personnel, including pension and retiree health benefits.

Over the past three years, the city has trimmed $90 million from its budget to ensure a balanced ledger. However, this year the deficit is pegged at another $23 million, $26 million if the city takes certain actions to stabilize its accounts and rebuild a responsible reserve. The annual deficits will continue for the next decade, reaching $46 million by 2015/16 and $56 million in 2020/21. That number could reach $88 million by 20/21, if salaries and benefits are restored to pre-concession levels.

Even as the confidential negotiations of AB 506 continue behind closed doors, , a very public debate continues in Stockton.

Those who supported moving into the AB 506 process – including the city’s mayor and city manager – continue to assert that further cuts to services will endanger public health and safety. Citing recent crime statistics in the staff report, city manager Bob Deis says that violent and gun crime has risen in recent years as a result of cuts to police.

“In 2011, there were 58 homicides in Stockton, an all time record,” reads the staff report. “At this time last year, there had been seven homicides, but as of May 4, 2012 we were already up to 23 for the year. We are also experiencing a 30% increase in gun violence from last year.”

Much of the blame for the current financial trouble has been placed on the city’s retirees and the cost of their healthcare.

In late 2011, those retirees formally incorporated their own association, the Association of Retired Employees of the City of Stockton. They are working to protect the benefits promised to retirees and are preparing to defend those benefits in bankruptcy court.

“While mediation is proceeding, I am no more optimistic today than on the day the City was required to begin the Mediation Process because the City Manager and the City Council (with the exception of Dale Fritchen) continue to publicly attack retiree medical,” writes the Association in a newsletter to members dated June 1.

“As a result of what has been reported to the Board of Directors concerning the real content of the mediation sessions… We are accelerating the process of preparing for a legal defense in bankruptcy,” continued the report to members.

The Association has retained the services of Felderstein, Fitzgerald, Willoughby & Pascuzzi LLP, the same firm that represented CalPERS in Vallejo’s bankruptcy case.

With the 6-1 vote, the city has opened the door to a potential bankruptcy filing.

“We will come through the AB 506 process or chapter 9 with a financially sustainable future,” said Mayor Johnson. “Even though we have inherited this mess, we are committed to doing everything in our power to leave this City better, stronger and healthier.”

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