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Stockton files for bankruptcy

5:59 PM, Jun 28, 2012   |    comments
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STOCKTON, CA - Stockton filed for Chapter 9 bankruptcy protection Thursday afternoon in a Sacramento federal court.

A budget adopted by the Stockton City Council at Tuesday night's meeting, a Pendency Plan, outlines an operational budget that allows the city to offer services and suspends payments to bonds.

RELATED STORY: Stockton votes to file for bankruptcy, becomes largest city in US to do so

City spokesperson Connie Cochran said the plan includes:

  • Suspending payment of bonds
  • Claims and long term debt paid by the General Fund
  • Shifting some funds to other sources
  • Modifications to terms of labor and employee agreements that reduce costs
  • More employee salary and benefit reductions
  • Reduction and ultimately elimination of city contributions to retiree medical insurance.

"We are extremely disappointed that we have been unable to avoid bankruptcy," Stockton Mayor Ann Johnston said in a statement. "This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens.  We will emerge from bankruptcy with a solid financial future."

"There are no measurable service reductions included in the Pendency Plan, and citizens will not see any changes in service after July 1," Cochran said in a statement. "Employees, vendors and service providers are essential to providing services and will continue to be paid in a timely manner."

What comes next for Stockton

Sacramento bankruptcy attorney Anthony Hughes said filing is just the first step in legal process that's likely to be lengthy.

"Parties and interests have the opportunity to object to the fact the city is in bankruptcy," said Hughes.

Bankruptcy can be challenged by Stockton's 18 creditors and union groups. To be considered eligible for bankruptcy protection, Stockton will have to prove that it is insolvent and tried to resolve its debts before filing bankruptcy.

The city of Vallejo entered bankruptcy protection in 2008 and  emerged from bankruptcy this year. But other cities never went further than filing ... Bridgeport, Connecticut's bankruptcy was rejected in 1991 after the state said it had money in its reserves to pay bills. Last October, Harrisburg, Pennsylvania was considered too small a city under state law to seek protection from creditors.

Since Stockton has already completed the mandatory mediation required under the new AB 506 law, some bankruptcy experts said it should likely qualify for Chapter 9. The next step will be by creditors.

"Anybody who feels they're owed money by the city will have to fill out a claim form and send it in to court," said Hughes. "The U.S. Trustee Office, a division of the Department of Justice, will establish a creditors' committee that will represent the creditors as a whole." 

Stockton can accept or object to the claims. The city must also file a Plan of Reorganization with the court on how it will get out bankruptcy. Since Stockton would become the biggest city in the country to receive bankruptcy protection, Hughes anticipated Stockton will set a precedent for each U.S. city considering filing Chapter 9.

"There are so many people who are owed so much money, there's probably going to be heavy litigation," said Hughes.
"Stockton is probably going to impact and change laws across the country."

Chapter 9 bankruptcy protection was established in 1934 to protect municipalities struggling through the Great Depression. Since 1934, less than 500 municipalities have filed for bankruptcy protection.

"If Stockton successfully uses Chapter 9 to reorganize, I think a lot of other cities will see it as an opportunity," said Hughes.


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