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Stockton 'Hit the Wall,' Prepares Chapter 9 Filing

On a 6-1 vote Tuesday, the Stockton (CA) City Council approved a measure authorizing its city manager to file a petition seeking protection under Chapter 9 of the U.S. Bankruptcy Code. After more than two months of negotiations under a new California law that mandates talks between debtors and creditors and an extension that provided temporary hope of avoiding municipal bankruptcy, it appears the city could now end up in Chapter 9 before month's end.

The city, which boasts a large number of retiree entitlements and the second-highest foreclosure rate among U.S. cities, and its creditors, not coincidentally including a public retirees union and Wells Fargo, have agreed to continue to extend negotiations through June 25 while the filing is prepared. The talks began in February and, though promise was shown, progress has stalled.

"We have hit the wall," said Stockton Mayor Ann Johnston in a statement Tuesday. "This is the action that we must take to keep the services that are important for the safety and health of our citizens." The city is on track to run a $36 million deficit thanks in large part to the $700 million it owes to various creditors.

The 2011 California law's mandated mediation is aimed at keeping struggling municipalities from hastily entering into a Chapter 9. If eventually filed, Stockton would become the largest bankruptcy filing of any city in U.S. history.

Several other California communities, as well as cities in other parts of the country, are watching quite closely how this situation develops. Meanwhile, a new report out of the state last week noted that at least a dozen of California's public schools serving more than 2.5 million children do not have enough money to operate properly over the next year. Strained budgets could lead these schools to eye the same option Stockton leaders clearly appear to be leaning toward in an attempt to gain breathing room from their creditors.

- Brian Shappell, CBA, NACM staff writer