(MintPress) – As Stockton, Calif. readies itself to become the nation’s largest city to file for bankruptcy, its status as an outlier is limited in scope. Cities around the country have already launched bankruptcy and protection filings since the peak of the recession, from Rhode Island, to Pennsylvania and Alabama.
Stockton, with a population of nearly 300,000, began a mediation process with creditors three months ago. The deadline of the negotiations passed earlier this week, which led to the Stockton City Council to vote 6-1 to adopt measures for Chapter 9 bankruptcy protection. In the process, the city will still solicit creditors as a means to work its way out of a $26 million deficit, according to the Los Angeles Times. The move, however, does not mean the city will come to a halt.
“Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency,” Stockton City Manager told CBS News. “The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation. Bankruptcy provides the equivalent of a pause button. It retains services and provides structure so you don’t have a bunch of lawsuits.”
The city has been decimated by circumstances of costly investments and has taken the brunt of one of the highest foreclosure rates in the country. Foreclosure filings in Stockton come in at an average of 1 in 88 homes, a rate that is 7.5 times higher than the national average. The rash of foreclosures has caused property tax revenues for the city to plummet.
During the housing burst, the city made questionable investments in a sports arena and hotel, neither of which produced economic solvency for the city. In response to a ballooning deficit, the city axed one-quarter of its police force, one-third of its fire department staff and nearly half of its remaining city workers.
Stockton’s decision of bankruptcy filled the city council room with citizens feeling as though they were thrown under the bus, arguing that Stockton gets a timeout to figure out its fiscal problems while citizens struggle through theirs.
“The average citizen will not put up with this. Their home prices have plummeted, they have no jobs, a lot of people are getting fed up so that they have to resort to crime,” unemployed Stockton resident Gregory Pitsch told the council. “I’m asking you to make the right decision, not destroy the property values in this city, which bankruptcy will do.”
Not a clean slate
Chapter 9 bankruptcies have been an outlet for many struggling cities around the county in the past two years. The resolution is only available to municipalities, and it allows cities to reorganize their debts and staff, rather than forcing a liquidation of all assets. Cities submit and file for bankruptcy in a court, a very similar process to that a consumer filing for bankruptcy would follow. The downside of a city filing for bankruptcy? It’s expensive, and it can push cities deeper into debt, according to Chicago bankruptcy attorney James Spiotto.
“Filing bankruptcy is time-consuming, expensive and complicated,” Spiotto told CNBC. “And you never get the results you desire.”
When the city of Vallejo, Calif. filed for bankruptcy protection in 2008, Deborah Lauchner, the city’s finance director, said every move the city made was under a microscope and that the morale of workers took a hit because the investigation into the city’s finances created a swath of uncertainty.
“Being in bankruptcy is decimating to your staff and morale,” Lauchner said. “There’s so much uncertainty … We’ve been taken apart and ripped by the seams and everybody examined us.”
University of the Pacific political science professor Robert Benedetti said the move only buys the city time to find potential creditors and does not necessary remove the ailments that caused the city to accumulate too much red ink in the first place.
“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.”
Last fall, Wall Street Journal municipal finance reporter Michael Corkery told National Public Radio (NPR) that the increase in cities seeking bankruptcy protection is a result of cuts that started at the federal level at the beginning of the recession.
“Cities and counties are getting hit. They’re getting squeezed the most. You know, the cuts are starting at the federal government, pushed down to the states,” Corkery said. “The states are then pushing cuts in aid down to the local level. And it’s the local level where the biggest squeezes are feeling [sic]. So that’s – in the municipal world, that’s where the biggest – weakest links are.”
The bigger they are, the harder they fall
The last high-profile municipality to declare bankruptcy occurred last November when Jefferson County, Ala. filed the largest municipal bankruptcy claim of $1.1 billion. It was the seventh municipality to declare bankruptcy in 2011.
Jefferson County, home to Alabama’s most populous city Birmingham, plunged into a myriad of debt after elected officials and investors failed to come to an agreement on the refinancing of sewer bonds. The bankruptcy claim leaves all of those investors, one of which included JPMorgan, out of hundreds of millions of dollars in investment money.
The county is still trying to emerge from its fiscal nightmare. Bloomberg News speculated that residents and businesses could still suffer higher taxes and sewer bills in the county’s attempt to heal its economic woes.
But from big cities to big debt, the city of Central Falls, Rhode Island showed that is it possible to have a big recovery. As the state’s poorest city, Central Falls fell into bankruptcy after retirees from the city refused to accept cuts to their pensions and benefits. The situation created tension between retirees and city officials, who argued that pensions were the only tangible thing that could be cut to relieve the $80 million debts – a figure that is five times higher than the city’s annual budget of $17 million.
The city’s fire chief, John Garvey, said the pension plan is built around the understanding that retirees get their fair share of what they put in.
“You could say it’s not fair because all of us have contributed to the pension plan for our whole careers on good faith,” Garvey told Bloomberg. “We had to, there was no choice; we had to contribute. Now part of it is not going to be there.”
But the city said cutting pensions and benefits was their last line of defense and that the pensions alone did not contribute to the totality of the city’s debt.
“The city’s financial condition has deteriorated to the point where it is insolvent,” Justice Robert Flanders said in the filing. “The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”
When the city filed for bankruptcy, it expedited the process of reducing pensions and benefits. For some, pensions were cut by almost one-third. The move allowed Central Falls to escape bankruptcy within a few months of its initial claim, but economists say it could take years before cities are able to balance their budget appropriately. Rosemary Booth Gallogly, Rhode Island’s director of revenue, said the resolution was bittersweet when looked at from a pension perspective, but also from a budgetary perspective.
“We’re not really proud of what came out of that,” Gallogly told WPRI. “While we’re really pleased with how our hard work has paid off, we’re not really gleeful because there were a lot of people who were hurt by it. So it’s kind of a balance. We really haven’t tried to say, wow, we really got this done.”