Stockton is largest US city to seek bankruptcy

Stockton has filed for bankruptcy protection, making it the largest American city ever to go broke.
City Manager Bob Deis said officials sought the status Thursday in federal bankruptcy court in Sacramento, as expected.
The filing comes after officials were unable to reach a deal with the city's creditors to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy.
Stockton, a river port of 290,000 in Central California, was one of less than half dozen larger governments to seek federal bankruptcy protection in U.S. history, according to James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies.

Thousands of new homes mushroomed in Stockton during construction bubble, and the city in California's agricultural heartland became beset by foreclosures with the second highest rate in America. Stockton's property taxes and other revenues sharply declined, while expensive investments and generous retiree benefits drained city coffers.
Bankruptcy has been used sparingly and mostly by small government entities such as water utilities and other special districts, Spiotto said, because it halts a city's ability to develop.
In the past, large municipalities have received assistance from states or have internally refinanced their obligations, he said.
Since Congress amended the bankruptcy code in 1937 to allow municipalities to seek protection, some 640 government entities have filed.
Stockton is the largest city by population to seek bakruptcy protection, Spiotto said. Other large ones were Bridgeport, Connecticut in 1991 (its filing was dismissed by a judge), Orange County in 1994, Vallejo, California in 2008, and Jefferson County, Alabama in 2011.
By comparison, roughly 1.5 million Americans file for personal bankruptcy each year, while some 50,000 companies file for business bankruptcy.
"People will be watching," Spiotto said. "Is Stockton just another aberration, or is it a growing trend?"
In Stockton on Tuesday, the City Council approved a budget-in-bankruptcy that plugs next year's anticipated $26 million shortfall out of the city's half billion spending plan.
The special budget suspends debt payments, reduces payments for retiree medical benefits and increases revenue through code enforcement and parking citations, among other measures.
City officials declined to provide the city's total debt, or a list of all its creditors. The 18 largest creditors who participated in mediation included Wells Fargo & Co., retiree groups and labor organizations.
Under bankruptcy protection, Stockton officials will retain power over day-to-day city operations and staffing, but a judge will 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 will decide which creditors should be paid, how much and in what order. But he will also make allowances for expenditures needed by the city to function, and it will be up to city officials to decide how to spend that money.