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California Law Said Unlikely to Avert Stockton Bankruptcy

A California law in its first test at forestalling municipal bankruptcies is unlikely to prevent Stockton from becoming the largest U.S. city to seek protection from creditors, according to officials of two employee unions.

The agricultural center of 290,000 has been in talks on its debts with the unions and others even as Wells Fargo & Co. (WFC) seized control of a downtown building that Stockton bought with $40.8 million in bonds for a new city hall. The city missed a payment of $197,280 in April, according to a regulatory filing.

The law that took effect this year requires cities to pursue mediation or declare a fiscal emergency before seeking bankruptcy court protection. Two of the biggest U.S. municipal bankruptcies have been in California: Orange County, in 1994, and Vallejo, in 2008. Stockton’s City Council is to vote June 5 on authorizing a bankruptcy filing if the talks fail.

“I don’t see this as a bargaining tactic by the city,” Joseph Rose, the lawyer for the 385-member Stockton City Employees’ Association, said by telephone yesterday. “I do see bankruptcy as an inevitable fact of life in this process. It doesn’t have to do with tactical considerations by the city or anyone else.”

Stockton faces a $26 million deficit in the fiscal year that begins July 1. Negotiations with creditors are scheduled to end June 25, days before the deadline for reaching a balanced budget.

Bond Default

To conserve cash, the city defaulted this year on $2 million in bond payments on three downtown parking garages and the building designated as the new city hall. As a consequence, Wells Fargo took control of all four properties. Spokeswoman Elise Wilkinson didn’t respond to a phone call and an e-mail message yesterday seeking comment on the bank’s plans.

Standard & Poor’s yesterday lowered its underlying rating three levels to BB+, the first noninvestment level, from BBB+ on the Stockton Public Financing Authority’s 2005 senior-lien water revenue bonds and 2010 variable-rate water revenue bonds.

The farming and port city about 80 miles (130 kilometers) east of San Francisco is the center of a metropolitan area with a 15.5 percent unemployment rate in April. The U.S. Labor said today the national rate was 8.2 percent in May, up from 8.1 percent the previous month.

Communities and states across the U.S. face soaring costs for pensions and retiree health benefits even as revenue from sales and property taxes was depressed by the longest recession since the 1930s.

Shift in Responsibilities

The problem is especially acute in California, where total assessed property values fell 4.5 percent to $4.51 trillion last year from 2009, according to state controller data. At the same time, Governor Jerry Brown and lawmakers have shifted responsibilities such as the incarceration of certain prisoners from the state to local governments.

Stockton already has cut its workforce, imposed unpaid furlough days on employees and increased employee contributions for pensions and health care. That probably won’t be enough to avoid bankruptcy, the head of the city’s firefighter union said yesterday.

“This is real,” said Dave Macedo, president of the 173-member Stockton Professional Firefighters Local 456. “The city, outside of labor, has some serious obligations to bondholders and the banks.

‘‘They’re going to roll the dice, more than likely go to bankruptcy,’’ he said by telephone. ‘‘There don’t seem to be many other options.’’

A city spokeswoman, Connie Cochran, said the council vote on empowering the city manager to seek bankruptcy protection is meant only to keep an option open as the city races against a deadline to adopt next year’s budget.

‘‘We’re on a tight timeline,” she said by telephone. “We have to have a budget by July 1. We have to be prepared for contingencies.”

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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