California’s Stockton May Skip $10 Million Owed on Debt

Stockton, California, facing a $26 million deficit, laid out a bankruptcy contingency plan that includes skipping $10.2 million in debt service in the fiscal year that starts next month.

The plan, described on Stockton’s website yesterday, would pair a total of $12 million in debt expenditure reductions with $11.2 million in cuts to employee pay and benefits. It will be presented to the City Council June 26 for consideration.

The community of about 292,000, described as the 10th-most dangerous in the U.S. in terms of violent crime, is poised to become the biggest U.S. city to enter bankruptcy. The council will vote on the plan a day after the close of mandated talks with creditors on concessions to help avoid a bankruptcy filing.

“The city cannot assume that agreements reached will enable the City Council to completely close the budget gap,” City Manager Bob Deis said in a memo accompanying the plan. The plan says the city’s proposed general-fund budget for fiscal 2013 has an operating shortfall of $25.9 million.

If tentative agreements are reached in the talks, “they will be honored and will contribute to the city’s ability to use bankruptcy as efficiently and expeditiously as possible,” he said.

The city, located about 80 miles (130 kilometers) east of San Francisco, is required by the state constitution to adopt a balanced budget for the year that starts July 1.

Retiree Cuts

The plan, which would produce a general-fund surplus of $39,000, includes a $7.1 million reduction in payments for retiree medical benefits for a year before eliminating the payments the following year. Deis has said escalating health costs for pensioners contributed to the city’s insolvency.

The debt service reductions would skip paying $5.8 million owed on 2007 pension-obligation bonds and $2.6 million on 2007 variable-rate debt lease-revenue bonds for a new City Hall. The plan also calls for appropriating $3.5 million for Chapter 9 restructuring costs.

The council voted June 5 to give Deis the authority to seek Chapter 9 municipal bankruptcy protection for Stockton as soon as June 26, if the negotiations with creditors fail.

Stockton could join Central Falls, Rhode Island, which filed in August after failing to win union concessions, and Jefferson County, Alabama, which initiated the biggest U.S. municipal bankruptcy in November, with $4.2 billion in debt. Vallejo, California, near Napa Valley’s famed wineries, exited court protection last year.

Fiscal Factors

Stockton buckled under the weight of retiree health costs, dwindling tax dollars in the wake of the recession and accounting errors that overstated municipal revenue. City officials in February agreed to the talks with creditors under a labor-backed state law aimed at deterring bankruptcy filings while providing guidelines to follow.

Negotiations began on March 27 and were extended to June 25. The California Public Employees’ Retirement System, the largest U.S. pension, and San Francisco-based Wells Fargo & Co., the nation’s biggest home lender, were among 18 creditors involved in the talks.

“By the time the City Council hears this item, we are hopeful that we will have reached tentative agreements with some creditors,” Deis said in the memo.

The community’s financial practices and reporting are the subject of a state investigation to clarify the fiscal situation, California Controller John Chiang said in April.

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