SAN FRANCISCO — Stockton’s City Council Tuesday night will consider whether it will become the largest U.S. city ever to file for bankruptcy protection after negotiations with creditors ended on Monday.
Stockton will announce during the council meeting on Tuesday the results of the confidential mediations with creditors. Those results will decide whether the city files for Chapter 9 protection in federal bankruptcy court, according to city spokeswoman Connie Cochran.
Cochran said there is no set date yet for the city to file for bankruptcy if the council makes the decision to do so.
If creditor talks have failed, Stockton, with more than 300,000 residents, could become the largest city in the country ever to file for bankruptcy.
The decision to file would also likely start a long slog in federal court to come up with a plan to trim its debts that a bankruptcy judge would need to find acceptable.
By comparison, Vallejo, Calif., spent more than three years and more than $9 million on attorneys before exiting bankruptcy. As part of its plan, Vallejo slashed bondholder debt by almost 50% and unsecured claims by 80% or more.
Stockton has hired the same bankruptcy attorney who represented Vallejo, Marc Levinson from Orrick, Herrington & Sutcliffe.
After years of declaring fiscal emergencies, Stockton’s City Council lurched towards bankruptcy when its voted on Feb. 28 to enter into deliberations with creditors under last year’s Assembly Bill 506, which strongly encourages municipalities to try mediation prior to filing for Chapter 9 protection.
After 60 days of confidential talks were extended another 30 days, city manager Bob Deis announced Wednesday that council members would consider a plan to slash more than $10 million of debt payments to help close its $26 million budget gap, if the mediation with creditors failed.
The city must pass a balanced budget by the end of the fiscal year on June 30, according to the state constitution.
Under the proposed plan, Stockton would withhold a $2.58 million payment on its 2007 variable-rate lease revenue bonds and a $5.7 million payment on its 2007 pension obligation bonds during the next fiscal year. It would also continue to miss payments on its 2004 lease revenue bonds.
Stockton has already let three sets of bonds default — the 2007 and the 2004 lease revenue bonds, as well as another set issued in 2009 — after the city decided in February to stop paying its part on $110 million of par value of debt through the end of the fiscal year. Seven bond issues rely in some way on support from the city’s general fund.
As a result of the defaults, the city has lost possession of three parking garages tied to the 2004 bonds along with an office building that had been slated to become the next city hall, and whose lease revenues support the 2007 bonds. Stockton lost possession of the two properties after Wells Fargo, the trustee for the debt, sued for control of the revenues.
Another $55 million of variable-rate revenue bonds issued in 2010 by Stockton’s financing authority could be declared in default by Union Bank, the letter-of-credit provider on the debt, resulting in a mandatory tender, according to city officials.
The city had more than $702 million of bonds outstanding as of the end of June 2010, including debt issued for restricted enterprise funds such as water, sewer and parking enterprise debt, according to the city’s most recent audited financial statements.
Stockton officials have said the debt tied to restricted funds would be protected from the bankruptcy process.
Located in the Central Valley of California, Stockton has been struggling for years under the high cost of rich retirement benefits and debt it incurred during the housing boom.