Stockton Bankruptcy ‘Only Choice Left,’ City Manager Says

Stockton, California, approved a spending plan it would use to operate under bankruptcy, moving closer to becoming the biggest city to seek Chapter 9 protection in U.S. history.

The budget for the fiscal year beginning July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits under union contracts that could be voided in bankruptcy. The city of 292,000 may file for protection this week before the budget is implemented.

“We think Chapter 9 protection is the only choice left,” City Manager Bob Deis told the City Council, referring to the section of federal bankruptcy law applicable to the municipality.

Stockton, a river port about 80 miles (130 kilometers) east of San Francisco, ran out of options after three months of state-mandated negotiations with creditors ended yesterday without enough concessions to close a $26 million deficit.

“We’ve worked really hard with our creditors and we’ve been unable to close the gap,” Deis said. “If we get any agreements in the near future, then those will be honored in Chapter 9.”

The city in California’s agricultural Central Valley saw a surge in homebuilding during the housing boom in the 2000s as buyers from the San Francisco Bay area sought affordable alternatives. The boom filled tax coffers, prompting the city to borrow to build entertainment venues and spruce up the downtown on the notion that the prosperity would last.

The collapse of the housing market left Stockton to contend with mounting retiree health-care costs and eroding tax dollars in the wake of the recession, amid accounting errors that overstated municipal revenues.