Stockton Bankruptcy Update ... No GM/UAW Type Government Bailout This Time

As expected, Stockton will be entering bankruptcy proceedings, according to reports from the city's meeting late yesterday.

Stockton City Council Votes in Favor of Bankruptcy Budget says this:

"The city of Stockton, Calif., late Tuesday voted to adopt a new budget under which it can operate if it is under bankruptcy, a move widely considered the last step before it formally files for Chapter 9 protection.

At a Stockton City Council meeting Tuesday, members voted 6-1 in favor of the budget, which allows the city to pay for day-to-day operations while it is in bankruptcy protection. While the Council didn't formally declare that Stockton is bankrupt, officials said filing for Chapter 9 protection is the city's only option.

Council member Paul Canepa, who voted for the budget, said, "With a heavy heart, I will be supporting this...I'm very sorry for this decision but I have to do this."

Marc Levinson, Stockton's bankruptcy attorney, said the city and its creditors tried to reach deals but the "gap was too deep."

City officials are expected to officially file for Chapter 9 protection sometime this week, possibly as early as Wednesday.

Under the new budget, Stockton will cut $10 million in debt payments to creditors, scale back retiree health care, and cut employee salaries and benefits. Under California law, Stockton must adopt a balanced budget by July 1.

"This is a sad, sad day for the city of Stockton," Stockton Mayor Ann Johnson said during the meeting.

Chapter 9 bankruptcy protection provides a financially distressed municipality protection from its creditors while it develops a plan for adjusting its debts. Creditors cannot demand a liquidation of assets to force the municipality, while under protection, to repay debts. . . .

Stockton has spiraled into a morass of debt because of high retiree costs and big spending on a downtown revitalization effort, coupled with falling property-tax revenues because of the real-estate downturn, among other factors.

In February, Stockton began negotiating with 19 parties, including retirees and city workers, under a California law that requires municipalities to try mediation before filing for Chapter 9 bankruptcy. That mediation process expired Monday.

At the City Council meeting Tuesday, dozens of retirees spoke and expressed concern over the effects that a bankruptcy would have on their medical benefits.

Gary Jones, 52 years old, who retired from Stockton's Police Department in 2006 after the discovery of a malignant brain tumor, was among former city workers worried about their health care.

"I have tons of medications I take every day. I have facial seizures," he said, adding that if Stockton declares bankruptcy, "I won't have insurance."

Stockton faces pressure on how to handle retiree costs, with retiree health care costs expected to increase by 115% and pension costs by 94% by 2022. Retiree costs represent nearly 20% of the city's $150 million budget.

Bob Deis, Stockton's city manager, said during the meeting the city had committed $600,000 to $1 million to retirees' health-care costs and "we've set aside nothing.""

My Take

It is indeed a sad day when a city or other governnment entity goes into bankruptcy, because that means (1) that it can't pay its bills and (2) that its creditors and employees, along with union leaders and city officials, can't or won't come to an agreement as to what to do about it.

In an effort to escape responsibility for what comes next, they pass the problem on to the bankruptcy officials.  And what comes next won't be pretty.

Money used to build facilities with "known unknown" taxpayer contingent liabilities attached, as well as retiree benefit promises made to city workers made but not properly funded, are the primary reasons for Stockton's self-inflicted wounds. Sound familiar?

Looking at this bankruptcy filing from a broader perspective, the federal government rescued the UAW union when it intervened in the auto (GM and Chrysler) bailouts. Of course, they handed the nation's taxpayers the bill for doing so.

We'll continue to discuss this later today, and try to discern the larger message for cities, states and countries, including ours, contained in the Stockton example.

It's all about spending recklessly, making promises recklessly and then being unable to rein in that spending prior to the financial situation getting out of control. Even then it's not completely beyond repair, but the parties that did the damage are unable or unwilling to make the necessary, albeit painful, decisions about what needs to be done. It's that old difference between popularity and leadership coming to the fore once again.

The parties, including union "leaders" and city officials, acting as responsible grownups, should have arrived at a consensus with respect to what to do about "repairs" instead of passing the problem on to bankrupcty court.

In other words, this is simply another example of responsible political and union leadership being absent in Stockton.

What makes Stockton worth studying carefully, of course, is that it's not a unique situation in California, America or many other parts of the world today.

There are lots of "Stockton" type messes that won't clean themselves up, so the only remaining question is how, when and by whom the inevitable necessary decisions and actions will be taken.

Thanks. Bob.