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Stockton bankruptcy: City could file as early as Thursday

June 27, 2012 |  5:35 pm

Stockton is expected to file papers seeking bankruptcy protection in federal court as early as Thursday.

The council, which decided to take the action Tuesday, 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.

Other municipal leaders say they don’t like what they see coming out of the Central Valley port city but insist their own financial stress does not come close to the draconian course taken by Stockton’s City Council.

“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.”

Miguel Santana, Los Angeles’ chief administrative officer, sees Stockton as a lesson in what can happen if the city doesn’t continue making adjustments to match lowered revenues. In a budget outlook prepared in April, Santana alluded to Stockton’s financial meltdown in urging the mayor and City Council to push for higher taxes and spending reductions over the next four years.

“Bankruptcy is what you do when you run out of options,’’ Santana said. “We still have a number of options before us. They are just hard.”

They include adopting a pension plan for new civilian hires, partnering with nonprofits to run the city’s zoo and cultural centers, and seeking new taxes, Santana said. “Bankruptcy is not an option,’’ he said.
 While Stockton’s troubles arose in part from ill-advised spending on waterfront redevelopment as the housing bubble burst and the recession hit, it also came from adoption of unsustainable labor contracts, according to the city. That’s a longer-term problem vexing the state and scores of cities and counties, analysts say.

In 2008, Vallejo filed its own Chapter 9 bankruptcy, spurred by labor contracts the city said it could no longer afford.

Vallejo has since cut down to a skeletal staff and won concessions from its unions on raises, vacation time and healthcare benefits, both for current and retired employees. Bankruptcy attorneys say Chapter 9 filings give the court wide latitude to cancel or cut back on promised pensions.

Under the law, municipalities have the right to ask the Bankruptcy Court to determine whether labor agreements should be rejected as was done in Vallejo after it filed for bankruptcy in 2008. Three of four unions ended up renegotiating their contracts.


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-- Catherine Saillant