Bankrupt Stockton May Seek Higher Taxes to Combat Crime

The City Council of Stockton, California, the biggest U.S. city to file for bankruptcy, may boost its sales tax to add police as it faces a violent crime rate that jumped 25 percent last year.

A plan to be considered today would raise the tax rate to 8.75 percent from 8.25 percent, generating about $18 million a year that would be restricted from its creditors, according to the proposal. As many as 100 additional police would be hired, about 30 percent more than the 344 now authorized.

“Creditors don’t have a right to tell the municipality how to govern,” said Jim Spiotto, a partner who leads the bankruptcy group at Chapman & Cutler LLP in Chicago, when asked whether the city could keep the funds separate from payments to its creditors.

U.S. Bankruptcy Judge Christopher Klein in Sacramento, California, ruled yesterday that Stockton can remain under court protection. He rejected objections by creditors including Assured Guaranty Corp. and Franklin Resources Inc. who asserted that the city didn’t qualify for bankruptcy because it isn’t truly insolvent and didn’t negotiate a potential settlement in good faith.

Stockton’s violent crime rate jumped 25 percent from 2011 to 2012. In an attempt to stay solvent, the city of 296,000, an agricultural center about 80 miles (130 kilometers) east of San Francisco, cut 25 percent of its police force, resulting in a record number of homicides and a surge in property crimes.

‘Off Limits’

The revenue from the tax increase would be held in a restricted account “that is off limits to the city’s creditors,” according to the plan offered by Mayor Anthony Silva. It would require approval from two-thirds of voters in a special election to be held between August and November to qualify as a dedicated special tax.

Silva’s proposal was written with the help of former New York City Police Commissioner Bill Bratton, the former chief of police in Los Angeles, who in January was hired as a law-enforcement adviser by Oakland, California, to boost crime-fighting efforts.

Stockton “needs enough police officers to respond to emergency law-enforcement calls and to allow for proactive patrols that will deter criminal activity and restore public confidence in the safety of our community,” according to the plan, called the “Stockton Safe Streets Sales Tax Initiative.”

Bob Deis, Stockton’s city manager, recommended the city council “vigorously oppose” the mayor’s plan, according to a city document.

The plan “appears to be ‘bad faith’ with our creditors and bankruptcy judge” and “greatly harms our negotiating position with creditors by simply forcing this conversation in public right now,” Deis said.

Donald Cutler of Kekst & Co., a San Francisco-based spokesman for Assured Guaranty, said the company had no comment on the mayor’s proposal.

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