US city will be biggest to file for bankruptcy

STOCKTON, California: A California city will be the largest in the US to seek federal bankruptcy protection, a financial step of last resort that has reached its highest level among local governments in nearly two decades as the national economy continues to struggle.
Thirteen cities, counties and other government entities filed for bankruptcy protection last year. Stockton, a city of 290,000, is the seventh US municipality to file this year.
“Filing bankruptcy is time-consuming, expensive and complicated,” said James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies. “And you never get the results you desire.”
Since Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, some 640 government entities have filed. Last year’s 13 filings were the most since an equal number were filed in 1994.
By comparison, roughly 1.5 million Americans file for personal bankruptcy a year, while some 50,000 companies file for business bankruptcy.
Stockton City Manager Bob Deis said Tuesday that officials were left with little choice but to recommend bankruptcy after failing to reach finance agreements with creditors to address the city’s $26 million budget shortfall.
The City Council on Tuesday voted to adopt a special bankruptcy budget if the city files for bankruptcy, as expected, by Friday.
The city has been hit hard by high crime and the collapse of the housing market in the past three years. It’s also dealt with $90 million in deficits through a series of drastic cuts. The police force was cut by one-fourth, the fire department by one-third and other city employees by 40 percent.
Residents complained about plummeting property values, recurring break-ins and robberies.
“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.” said Gregory Pitsch, a 22-year-old unemployed resident who made an unsuccessful run for mayor. “I’m asking you to make the right decision, not destroy the property values in this city, which bankruptcy will do.”
But officials said this city in California’s agricultural heartland 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.
Under bankruptcy protection, 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.
“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.”