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Stockton bankruptcy: Other California cities concerned

June 27, 2012 |  3:54 pm

Stockton

City managers in Southern California are casting a wary eye on Stockton, the latest municipality to be headed toward bankruptcy court after spending on civic projects and labor costs accelerated far past its ability to pay its bills.

Many city officials say they don’t like what they see coming out of the Central Valley port city. But finance managers are quick to emphasize that, while suffering their own financial pinches, the draconian course taken by Stockton's City Council on Tuesday won’t be necessary at home.

"We are in tremendous pain. Our citizens are feeling the loss of services," said John Gross, finance director of Long Beach. "But that’s a big difference from Stockton."

While Stockton's troubles arose from a combination of spending on new civic projects, higher labor costs and steeply lower taxes, local governments everywhere are reeling from similar problems.

Long Beach has renegotiated contracts with its police and fire unions that will reduce current pension costs by hundreds of thousands of dollars each year, Gross said. In addition, retirement plans for new hires will be less generous.

It's still in negotiations with the city's other unionized workers, hoping to come up with savings that will stave off $16 million in cuts for the coming year, Gross said. The city has already laid off police officers and firefighters, cut library hours and doesn’t fill potholes as frequently as in the past, he said.

Stockton is a lesson in what can happen if the city doesn’t continue making adjustments to match lowered revenues — something the City Council fully intends to do, no matter how painful, the finance manager said.

On Tuesday, the Stockton City Council decided to seek protection under the U.S. Bankruptcy Code and is expected to file as early as Thursday. The council took additional action to reduce costs, but still could not fill a $26-million budget deficit. It ordered a stop to bond payments, slashed employee health and retirement benefits, and adopted a day-to-day survival budget.

The painful decisions came after months of negotiations with creditors under AB 506, a new state law that requires mediation before a municipality can file for a reorganization of debt. It was the first use of the legislation, which is designed to forestall a municipal bankruptcy.

Although mediation failed, bankruptcy experts said the process provided a vigorous discussion about Stockton’s financial situation, which should help the city maintain a reasonable relationship with its creditors and avoid the string of lawsuits that Vallejo faced after it filed for bankruptcy in 2008.

Although a comprehensive solution has not been reached yet, Stockton officials said they have entered into tentative agreements with about 30% of the city’s creditors and plans are being developed to deal with city’s bond-holders.

"There are some things we can take encouragement from," said Karol Denniston, a veteran bankruptcy attorney at Schiff Hardin in San Francisco. "The City Council actions should give us hope that we can restructure our municipalities faster and cheaper, which are important goals for everyone concerned."

Working against Stockton is the second highest violent crime rate in the nation and the economic recession, which has devastated the housing market and contributed to the current budget deficit. Like its crime problem, Stockton has the second-highest foreclosure rate in the country.

"Bankruptcy is a huge drain on municipalities," Denniston said, "because they have limited ways to create more revenue."

Not only do financially strapped cities have to deal with creditors, they must reverse their economic plight and spend money on services to retain and attract residents and businesses that can maintain and increase much needed tax revenue.

"How are they going to allocate money for crime-fighting and provide services that make the city an attractive place to live and work? It won’t be easy in this climate," said Chuck Moore, a certified public accountant and turn-around specialist in Detroit at Conway MacKenzie in Detroit who has advised distressed governments.

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-- Catherine Saillant and Dan Weikel

Photo: Members of the Stockton City Council voted 6 to 1 on Tuesday to adopt a spending plan for operating under Chapter 9 bankruptcy protection following failed talks with bondholders and labor unions. Credit: Justin Sullivan/Getty Images

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