The City of Stockton has set a new standard for municipal bankruptcy, after the city council voted Tuesday night’s meeting to move ahead with a pendency budget and a Chapter 9 filing. The move was largely expected after the confidential mediation process ended Monday night without a major breakthrough.
“We wish to protect and maintain the modest level of services that we provide now,” said city manager Bob Deis in a press release. “This is another big step in the City’s plan to get our fiscal house in order.”
The City is fiscally insolvent and must seek chapter 9 bankruptcy protection. In addition to the bankruptcy petition, the City will file a motion with the courts to share information from the confidential mediation process.
“This is the most difficult and heart-wrenching decision that we have ever been faced with,” said Mayor Ann Johnston. “We must take this action to protect the health, safety and welfare of the entire City and begin the recovery process.”
Steps and cuts implemented in recent years to save the city’s fiscal house fell short. Over the last three years, the city has cut $90 million in staffing, services, and programs. However, this year Stockton has another $26 million deficit to balance and no reserves to call upon.
During the boom years, the city spent lavishly on property, development, and staff salaries and benefits. All three have provided the squeeze to the city’s budget that resulted in the immediate cessation of bond payments to Wells Fargo. The bank has since repossessed the downtown parking garage and city hall that were funded with bonds they sold on behalf of the city.
Now, part of the bankruptcy budget that was approved on Tuesday, the city will halt millions in other debt service, risking further degradation of the city’s credit rating. However, by stopping further payments, the city can open up $10.2 million to plugging the budget gap. They hope to save another $11.2 million by reducing payments for compensation and retiree benefits.
During the last few months, the city’s credit rating was dropped into junk levels, and S&P rates the city as nearly in default.
The pendency plan and bankruptcy filing was approved on a 6-1 vote.