Stockton, California Weighs the Possibility of Chapter 9 Bankruptcy

May 25, 2012

By: John Clark

The city of Stockton, California is reportedly weighing whether to file for Chapter 9 bankruptcy in order to remedy its $26 million budget shortfall, according to a recent report from the Stockton Record.

This week, City Manager Bob Deis released a proposed budget that includes a $26 million gap, and he offered three potential solutions to cover the difference, including filing for municipal bankruptcy.

California’s Central Valley was decimated by the recent recession, and Stockton may have experienced the worst of the economic fallout. In his report, Deis gave a very grim outlook for the city’s financial health in the next five years.

In his opinion, “if I were to use one word to describe Stockton’s fiscal environment, it would be ‘chaotic.’” And the city’s limited options could spin it into further chaos.

Of the three options on the table, the most palatable to a majority of the city council is confidential mediation with its primary creditors to try to restructure its current debts.

These negotiations, however, would be a monumental task because the city owes millions of dollars to a wide range of creditors, including labor unions, former city workers, and Wall Street investors. Getting all these disparate parties to agree to a new debt plan could be quite challenging.

The second potential option is to lay off some city employees and reduce the salaries of others, although this strategy has already been deployed in recent years. And doing so again would further reduce the number of police officers in a city that is experiencing an unprecedented rise in violent crime.

So, the city may ultimately be forced to call a bankruptcy lawyer in order to save vital city sources and avoid potentially unfruitful negotiations with its creditors. The bankruptcy option, though, will reportedly face strong opposition from some members of the city council.

Councilman Dale Fritchen, for example, claims that the struggles faced by Vallejo, California, which filed for bankruptcy in 2009, would also plague Stockton. According to Fritchen, Vallejo’s bankruptcy filing led to half of the city’s police force leaving their posts.

In response, Deis observed that Vallejo started its filing at the beginning of the recession, which was the real cause for the police exodus.

In his words, there was no “tie between Vallejo cutting staff and bankruptcy,” and Deis reportedly does not anticipate that Stockton would have to lay off more employees if it did file for bankruptcy.