STOCKTON, CA - The Stockton City Council is poised to vote on whether or not to start the process to file for bankruptcy at Tuesday night's meeting.
California state law says cities must have a 60-day mediation period with its creditors where the city discusses ways to avoid bankruptcy.
After the mediation period, the city is allowed to file for bankruptcy if there is no plan to avoid it.
If Stockton files for Chapter 9 bankruptcy protection, it would be the largest city to file for bankruptcy in the country. Orange County declared bankruptcy in 1994; Vallejo filed for bankruptcy in 2008 and just emerged last year.
Stockton City Manager Bob Deis said a series of bad financial decisions and bad luck put Stockton close to the bankruptcy option. He alluded to a city council decision made in the 1990s as one example.
"City employees only had to work one month, then they could retire," Deis said. "The city would pick up their insurance for free for them, for their spouse, for the rest of their lives."
However, former Stockton City Manager Dwane Milnes, from 1993 to 2001, said Deis' claim is a misrepresentation. He said the retiree program was smart because employees agreed to take less in salary to pay for their benefits.
"It was good business at the time and if the city followed through with the plan, it could handle the costs," said Milnes.
On Friday, Moody's downgraded Stockton's credit-worthiness to below investment grade, affecting nearly $341 million of debt.
The rating for Stockton's 2007 pension obligation bonds were downgraded to Ba3 and 2006 lease revenue bonds were downgraded to B1.
"Moody's rates over 12,000 municipalities in the United States. Fewer than 30 are currently rated non-investment grade (Ba1 or lower)," Moody's spokesman David Jacobson said. "With yesterday's downgrade, Stockton is now rated Ba2. The most notable city on the same list is Detroit, which is currently rated Ba3 and is under review for a potential downgrade."
Stockton's credit rating could be further downgraded if the city files for bankruptcy.
According to the National League of Cities, city bankruptcy filings are rare. Two dozen states do not allow cities to file for bankruptcy; other states allow for bankruptcy filings, but regulate it.
As for Stockton, California Treasurer Bill Lockyer issued the following statement:
"We're monitoring the situation closely. Bankruptcy does more than inflict long-term harm on the community. The reputational stain can bleed onto other local issuers and the State, and that can hurt taxpayers in the bond market. So we hope a Chapter 9 filing is not the final outcome."