STOCKTON (AP) — Stockton could become the largest U.S. city to declare bankruptcy after a deadline to make a deal with its creditors passed and the city's mayor said Tuesday she did not believe a settlement had been reached.
Mayor Ann Johnston told KCRA-TV that a formal bankruptcy filing appears "very likely."
In the past three years, officials in the city that was slammed by the collapse of the housing market dealt with $90 million in deficits through a series of drastic cuts.
They eliminated one-fourth of the city's police officers, one-third of the fire staff, and 40 percent of all other employees. They also cut wages and medical benefits.
To plug next year's anticipated $26 million budget shortfall, a proposed budget that was being considered Tuesday night would suspend payments for debts and legal claims; reduce payments for retiree medical benefits; further cut some pay and benefits; and increase revenue through code enforcement and parking citations.
The proposed budget includes no major service reductions, City Manager Bob Deis said.
"The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation," Deis said previously. "Bankruptcy provides the equivalent of a pause button. It retains services and provides structure so you don't have a bunch of lawsuits."
A formal bankruptcy filing could come as soon as Wednesday.
City spokeswoman Connie Cochran has said the negotiations with creditors, which carried a deadline of midnight Monday, were confidential, and nothing would be announced until the City Council meeting Tuesday.
City officials say the river port city of 290,000 in the Central Valley has run out of options. In recent years, thousands of new homes mushroomed in Stockton, part of a suburban housing boom that attracted buyers from the San Francisco Bay area and beyond.
When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees.
Multi-year labor contracts for city workers carrying escalating costs and generous retirement plans added to the burden.
In addition, expensive city investments — a promenade, sports arena and hotel — failed to produce an economic boon.
The city also has high crime and unemployment rates. It has twice topped Forbes magazine's list of "America's most miserable cities."
If the city files for bankruptcy, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton.
The judge would decide which creditors should be paid, how much and in what order. He would make allowances for expenditures needed by the city to function, and it would be up to city officials to decide how to spend that money.
"One of reasons a city might want to go the bankruptcy route is that they don't want a situation where they have to pay out debts and have to close the police or fire department," Benedetti said. "Filing for Chapter 9 means you're asking the court to protect you against lawsuits from people who hold your debt."
If Stockton does file, it would be the largest city by population to do so, according to Jim Spiotto, a Chicago bankruptcy lawyer who tracks Chapter 9 filings. He said Bridgeport, Conn., is currently the largest city to file for bankruptcy, which it did in 1991, followed by Vallejo, Calif., which filed in 2008.
Jefferson County in Alabama is the largest local government bankruptcy filing to date in terms of the size of its debt. It occurred in November 2011 and was followed by Orange County, Calif., in 1994.
If a judge approves a bankruptcy plan, money to pay creditors would come from Stockton's general fund, which pays chiefly for public safety, including police and fire protection.
Experts say the bankruptcy filing, while protecting the city from catastrophe in the short run, should not be seen as Stockton's panacea.
"Bankruptcy won't take away Stockton's underlying financial problems, one of which is the economy, the high unemployment rate and the high foreclosure rate," Benedetti said. "It will take years for them to come out of this."
Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than six months old.
Under the law, municipalities considering bankruptcy must first negotiate behind closed doors with creditors for up to three months, with the goal of settling debts without filing for Chapter 9 protection.
If the city is eventually able to reach a deal through mediation, Deis said, City Council members could modify the budget to reflect the deal, or they could adopt the budget and come back in July to modify it.
Officials say they are optimistic, even if they decide to file for bankruptcy. They point to Vallejo, a smaller California city that filed for Chapter 9 protection in 2008 and emerged from bankruptcy last year.
"Vallejo is leaner, smarter and they've got the confidence of their citizenry," Deis said. "I think Stockton will be doing the same."
Benedetti said Stockton has some things going for it: An excellent location, successful inland port and good university.
"It has some promising economic resources, so it's not all down and out," he said.