Unable to cover its employee medical benefits, make bond payments, or reach a deal with creditors on its $26 million deficit, the former boomtown is the nation's largest city to seek bankruptcy protection. Jamie Reno on what went wrong.
 

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History was made this week in California--but it's not the kind of history chambers of commerce or tourist boards brag about. On Tuesday, Stockton, a city of nearly 300,000 located in California's Central Valley, about 80 miles east of San Francisco, become the nation's largest city to seek protection under the U.S. bankruptcy code.

Stockton, the seventh U.S. municipality to file this year and the first California city since Vallejo, which sought the same protection in 2008, simply stopped making bond payments and failed to reach financial agreements with creditors to address its $26 million budget deficit.

Stockton had 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. On Tuesday night, after a heated five-hour meeting in which city employees expressed their concerns about losing their pensions, Stockton's city council voted 6 to 1 to file for bankruptcy and to adopt the 2012-2013 budget, which proposes eliminating retirees' medical benefits to help reduce the city's deficit.

What happened in Stockton? In the mid-2000s, the city was hopping. The housing market was strong, and as a result tax revenues were flowing in. The city took out $190 million in bonds and loans to pay for a bunch of civic projects including a new city hall, a new multipurpose arena, and a baseball park.

But then the recession came, the housing bubble burst and, observers say, Stockton was hit even harder than most other California cities by the economic downturn. The city now has an unemployment rate of nearly 20 percent, and the foreclosure rate is one of the highest in the nation. It was ranked by Forbes magazine as America's "Worst Place to Live" two of the last three years.

According to San Diego bankruptcy attorney Paul Staley, who lived in Stockton for 10 years, "Stockton had become a bedroom community for commuters to San Francisco and Oakland, and that drove overbuilding. When the economy imploded, commuters started disappearing, and the city saw a flight of home buyers. Property values in Stockton then plummeted, perhaps more than anywhere else in the state and nation, and the city could no longer sustain itself or pay the generous pensions to city workers."

The city already has slashed the police force by one fourth and the fire department by one third, and cut 40 percent of other city employees, along with wages and medical benefits. Kathy Miller, a member of Stockton's city council and its vice mayor, tells The Daily Beast that the city had no choice.

Source: The Daily Beast | Jamie Reno