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Stockton sees 'no way out,' enters bankruptcy mediation

February 29, 2012 |  9:45 am

 Stockton moved a step closer to becoming the nation's largest city to file for bankruptcy when the City Council voted late Tuesday to stop payments to creditors and enter a mediation process.

It is the first city to resort to a recently enacted California law designed to slow a municipal bankruptcy filing. Under AB 506, all involved parties, including those who hold debt in the form of bonds and employee unions whose paychecks and benefits depend on city revenue, sit down to work out deals with a neutral evaluator, most likely a retired bankruptcy judge.

The 450-page council agenda described the plan as the city's attempt to restructure and avoid bankruptcy.

"Right now, we're a city that frankly has hit the wall," said Mayor Ann Johnston during the debate. "We see no way out of this except to begin this process."

The city hired attorney Marc A. Levinson to represent them, the same attorney who represented Vallejo when that city declared bankruptcy in 2008.

"I'm not an AB 506 attorney, because nobody is," he told the council.

Citizens packed the upstairs council chambers, ground floor and outside stairs, their moods shifting from intense to despondent.

"It's discouraging; it's upsetting, scary, all of those things," said Megan Escudero, 47, a mother of two who said her own family had suffered as Stockton was hit by the recession, suffering one of the highest rates of unemployment and foreclosures in the country.

"My husband lost his job and was out of work for two years. We'd just bought a house. But we found a way to hang on. We didn't consider bankruptcy," she said. "Why is the city?"

When AB 506 was passed, the bill by Bob Wieckowski (D-Fremont), a bankruptcy attorney, was criticized by municipalities as pro-union. But Wieckowski said it was designed to help cities avoid lawsuits if they do go into bankruptcy.

"No one knows what a garden-variety municipal bankruptcy looks like," Wieckowski said. "This gets all the players in one room to put deals in place and admit that in a situation like this there are no winners, baby."

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-- Diana Marcum in Stockton

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