Ed Driscoll

Stockton, California to File for Bankruptcy

And the big blue model hits an iceberg once again. The L.A. Times calls this central California city “largest U.S. city to fail:”

This Gold Rush-era port city, an epicenter of California’s agricultural exports, will become the nation’s largest city to seek protection under the U.S. bankruptcy code after its City Council on Tuesday stopped bond payments, slashed employee health and retirement benefits and adopted a day-to-day survival budget.

City Manager Bob Deis likened the process to cutting off an arm to save the body. He is expected to file bankruptcy papers immediately.

A Delta wind had scrubbed the Central Valley sky blue as residents gathered hours early for the 5:30 p.m. meeting.

Most knew what the night held; bankruptcy has been a long time coming. Stockton has been in negotiations with its creditors since late March under AB 506, a new California law requiring mediation before a municipality can file for reorganization of debt. It was the first use of the law, and policy analysts who watched its torturous and tedious progress have titled their report on it “Death by a Thousand Meetings.” Mediations ended Monday at midnight.

Recent council meetings have been boisterous and contentious. Tuesday night’s meeting was quieter, with an evident sadness on faces in the packed audience. Many residents said they were there mostly to hear for themselves that the day so long expected had finally come.

“It’s a seminal moment in this city’s history and I needed to be here,” said Dwight Williams, who runs a nonprofit housing organization. “I can’t just read about this in tomorrow’s paper. I need to hear for myself if there is some inkling as to where we go from here.”

An earlier article from Reuters summed up the causes of Stockton’s woes:

Stockton’s finances collapsed along with its housing market, forcing city officials to slash $90 million in spending in recent years and a quarter of positions across agencies.

Despite the cuts, Stockton has not been able to avoid recurring deficits. Its revenue is weak and its financial troubles have been compounded, according to city officials, by generous pay and benefits for city workers and retirees and too much debt taken on by the city when it enjoyed a home-building boom in the early part of the last decade that transformed it into a distant bedroom community for the San Francisco Bay area.

Many of the houses built and bought in that boom have been abandoned, repossessed and sold at deep discount as Stockton has been at the top or near the top of lists of housing markets suffering a glut of foreclosures in recent years.

Under its restructuring plan, Stockton has already defaulted on about $2 million in debt, allowing the trustee for one of its bond insurers to seize a building once slated to be its future city hall and three parking garages.

In 2010, Bell, California became a household name when reports of that tiny city’s corruption and enormous fiscal profligacy became legion. At the start of the previous year, Shannon Love of the Chicago Boyz econoblog noted that the state as a whole had reached the tipping point, when unionized state government employees could essentially vote themselves any raise they wished — reality? Forgetaboutit — the taxpayers work for us! Between the enormous spending and effectively one-party rule of the state, California is now a place only Paul Spend! Spend! Spend! Krugman and Thomas Friedman could love. For everyone else, this 2009 San Diego Union-Tribune cartoon describing California, then and now was right on the money — and now, in the case of Stockton, the lack thereof: