Stockton, California has officially become the most populous city in America to file for bankruptcy. A judge ruled today that creditors did not negotiate in good faith with the insolvent city, making Stockton the first US city since the 1930s to use bankruptcy as protection against paying its debt in full. Bloomberg reports:
Without bankruptcy court protection, Stockton’s creditors would be free to sue the city in state court, where it’s easier to force asset sales, cuts in city services or a boost in revenue to pay debt. While in bankruptcy, Stockton is shielded from such tactics and has more power to choose which bills to pay.
Before filing for bankruptcy in June under Chapter 9 of the U.S. Bankruptcy Code, the city asked bondholders and other lenders owed more than $300 million to take less than full repayment. The city listed assets of more than $1 billion and debt of more than $500 million in its bankruptcy petition.
Among other things, the city will soon stop paying for a retiree health care benefit (unfunded liability: $417 million) that allowed city employees to qualify for lifetime health coverage after only one month on the job. In the coming months, retirees will likely see sizable cuts to their pensions. Severe service cuts are also inevitable.
Stockton is already burdened with 18.7% unemployment and the highest foreclosure rate in the US, and now things are going to get much worse. These are the consequences of pursuing so many expensive public projects and endless employee benefits. The city’s leadership simply assumed that revenue would increase indefinitely. Now it’s all come tumbling down, and pensioners and the poor will suffer the worst of the fallout.
It’s hard to see how the state could be experiencing a “comeback” when multiple cities are declaring bankruptcy—San Bernardino is up next. This is just the beginning of Stockton’s legal and financial mess. The effect of today’s decision will be closely watched by unions and insolvent cities across the country.
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