The Stockton City Council voted 6-1 in favor of a budget that would see the city through the first steps of Chapter 9 bankruptcy. The city was expected to officially file for court protection sometime this week in an effort to relieve itself of bond payments and employee benefits that city management says are crippling Stockton.
It makes the county seat and city of 291,000 the largest municipality in the nation to file for bankruptcy.
According to Stockton City Manager Bob Deis, there was no other responsible way to deal with the city’s fiscal woes.
“We’ve been unable to close the gap,” Deis told a filled-beyond-capacity council chambers in Stockton’s City Hall. “We think Chapter 9 protection is the only choice left.”
Dale Fritchen, the only councilman to vote against bankruptcy, didn’t believe so. He’s spent the past few weeks trying to convince Stockton residents that filing Chapter 9 was an imprudent course of action, according to news reports.
“I think it’s going to hurt Stockton more than it’s going to help Stockton,” Fritchen said at the Tuesday meeting.
Stockton faces a 2012-13 fiscal year deficit of $26 million out of a $155 million general fund, according to city documents. Deis maintained that Stockton simply cannot endure a fourth straight year of multimillion-dollar deficits combined with a $417 million liability for unfunded lifetime employee health care.
During the housing boom of the past decade, Deis said, the city spent on employee compensation and development as if the revenue would continue to grow. When the housing market imploded, so did Stockton’s balance sheet.
“The city was essentially trying to fit a size 12 foot in a size 9 shoe,” he said, “and they were betting revenues would ultimately increase and things would get more comfortable.”
The city has trimmed $90 million from its general fund since the 2009-10 fiscal year, according to officials in Stockton, including layoffs to the fire department and police department.
Deis wrote in a letter to city-contracted vendors that Stockton “cannot and will not” use any of the $366 million of restricted funds in its budget — such as money for water, sewage and garbage services — to solve the general fund crisis.
As part of the proposed solution, Stockton will stop payment on $12 million worth of bonds and begin the process of eliminating health care benefits for retirees. Deis promised that the city would not stop paying people and businesses it contracts with for goods and services.
But not everyone at the Tuesday meeting agreed the city did everything it could to avoid the drastic action of Chapter 9.
Robert Rodriquez, retired for 10 years after serving 30 years as a Stockton firefighter, was one of many former city employees wearing a white shirt and a “Retiree” nametag.
He said that when members of previous city councils — including now-Mayor Ann Johnston — agreed to give retired employees lifetime benefits, they didn’t properly fund those benefits. Rodriquez didn’t dispute the city’s financial problems, but said the city’s leaders were negligent in putting off dealing with them until it became a matter of cutting loose retired and current employees from promised benefits.
“We knew they couldn’t sustain it unfunded,” Rodriquez said before the meeting. “If they didn’t know this, they shouldn’t be in office.”
The retirees also handed out “fact sheets,” which listed a number of talking points.
The list said under the city’s new plan, only 10 percent of employees would be able to afford insurance through the city; no plan would be offered to retirees with less than 10 years experience; and that the city manager “has the power of fiscal emergency,” which they said means there was no need for bankruptcy declaration.
But Deis countered that without the protection of the bankruptcy court, creditors who the city stopped paying back could compel payment or seize assets, such as happened with several city-owned garages that were reclaimed by Wells Fargo on behalf of an investor.
Stockton also lost a planned new city hall building while undergoing discussions mandated by state law before bankruptcy could be filed.
The discussions were required by Assembly Bill 506, a law seeking to give cities and their creditors a way out of dire financial straits without bankruptcy. Stockton is the first city in California to undergo the mediation.
Mediated meetings between Stockton and its creditors apparently failed to reach a non-bankruptcy solution, as the 60-day period plus 30-day extension for such talks ended Monday without any announced resolution.
When that effort proved fruitless, Deis said there were only two options for the city to balance its budget, as mandated by the California constitution: file bankruptcy or cut services. And services, he said, had already been reduced “to an unacceptable low level.”
A record 58 homicides were reported in Stockton in 2011, and already 32 have been reported in 2012.
Johnston agreed with Deis’ assessment, saying, “We believe that the citizens deserve more than that. We believe the citizens deserve more than half service.”
Deis also called asking residents to vote to tax themselves under the present circumstances “a nonstarter,” and that the Chapter 9 plan was the best way to maintain current public safety levels.
City officials acknowledged in the meeting, however, that their action could be subject to court challenge.
Leaders in Tracy, 15 miles to the southwest of Stockton, don’t seem to expect Stockton’s problems will have a large effect elsewhere.
Tracy City Manager Leon Churchill did say, however, that the larger city’s bankruptcy could tarnish the overall image of the region when it comes to landing prospective businesses.
“The only impact is to the degree Tracy is included in the Stockton metro area, so when site selectors and developers looks us up, we have some explaining to do,” Churchill said. “But that’s a modest impact.”
Churchill said the biggest thing for Tracy to take away from Stockton’s financial missteps is to not repeat them. Those mistakes include, he said, Stockton’s treatment of employee compensation and a downtown waterfront built in the hopes of creating a new economic engine that never materialized.
“We have to be aware of our labor costs, we have to be aware of major capital investment and their future costs,” Churchill said, suggesting any future projects built by the city must be carefully considered to make sure they don’t needlessly drain the treasury.
“We should be aware,” Churchill said, “and we should learn from others.”
• Editor's note: This article has been updated as of 1:30 p.m. June 27 to reflect the new tally of homicides in the city of Stockton.