When Cities Go Bankrupt: Stockton, California

Companies go bankrupt all the time.  Owning a business comes with risks like solvency, credit, operational, and management (among other risks).  But the thought of a government entity going bankrupt seems hard to imagine.  All it requires is a lack of revenues and a poor economy, and suddenly a city or county can find itself unable to pay its employees, ongoing bills, contractors, and even its interest payments on municipal bonds.

Meredith Whitney took a lot of heat for predicting the demise of many municipalities even though some municipalities have gone bankrupt.  Chalk up one more: Stockton, California.

The city’s new service said, “On Tuesday, June 26, 2012, the Stockton City Council approved a Pendency Plan proposed by the City Manager, 6 -1. The Pendency Plan is essentially the budget and the plan that is followed for the day-to-day operations of the City while in bankruptcy. It identifies what expenditures will be reduced or suspended. The City will continue to pay employees, vendors and service providers. The focus of the City?s plan is the restructuring of above market pay and benefits and unsustainable long term debt. Adoption of the Pendency Plan assumes the City will file for protection under chapter 9 federal bankruptcy laws before July 1, 2012.”

Here is the extent of the damage so far: The overall proposed expenditure plan was originally presented on May 15, 2012, and amounted to $521 million for all funds; the General Fund, which is $155 million of the total budget, has a $26 million deficit.

Stockton is not the first municipal bankruptcy.  If the economy goes back into a softening stance or in the red, Stockton won’t be the last.

JON C. OGG