Stockton, California, the largest US city to file for bankruptcy, never came close to striking deals with key creditors in talks before it sought court protection, the city disclosed on Friday in documents illustrating its stark choices.
The city's bond insurers snubbed proposals from managers of the city of nearly 300,000 in California's Central Valley, where crime and unemployment have soared as the housing market fell. Retired city employees and fire and police unions over three months made some headway, but in the end the only tentative deals were with six other unions.
The city is trying to convince a federal bankruptcy judge to give it Chapter 9 protection from creditors. Initial proposals included ending health care for retirees, suspending payments on much of its debt for five years and draconian cuts of payments on $124.3 million of pension obligation bonds. The city faces a $26 million shortfall in the current fiscal year, when its main budget, or General Fund, revenues are projected to be $155 million. It has cut $90 million in General Fund spending in the last three years.
Stockton's future may be a roadmap for other troubled California cities. Los Angeles-area's San Bernardino is preparing to file for bankruptcy and Compton may do so later in the year. Stockton's case will test how far courts are willing to let cities cut retiree benefits.
Stockton became an outpost of the San Francisco Bay Area, 80 miles away, when the housing market boomed, and the town began to spend like a big city, building a new sports complex, redeveloping its riverfront and buying a new town hall. The development is a money-loser, the town hall has been taken over by a creditor, and the mainstay of city finances - property taxes - has dried up; housing prices more than tripled in the first half of the last decade but faded back to 2000 levels in 2009.
The roughly 800 pages of proposals and records of meetings over three months that the city presented on Friday are its evidence that it negotiated in good faith and cannot afford to pay its debts. City Manager Bob Deis in an open letter accompanying the papers said the city could not cut services any more. "The City ranks at the top in violent crime and at the bottom in police officer staffing levels among major cities in the country. It has some of the busiest fire stations in the country," he wrote.
The proposals disclosed on Friday evening are months old, but the city sets the agenda in Chapter 9 talks. Its proposal to end health care coverage for retirees is already the subject of a related case, which has a hearing set for Monday.
Assured Guaranty, the insurer on the pension bonds, has scorned Stockton's efforts, arguing the city made no real attempt to raise revenue or cut pensions. City documents showed Assured, National Public Finance Guarantee Corp and bondholder trustee Wells Fargo Bank NA, which has repossessed three of Stockton's parking garages and the building slated to be city hall, did not counter Stockton's offers.
National Public Finance Guarantee Corp, a wholly owned subsidiary of MBIA Inc, has about $224 million of exposure to Stockton, including $89 million backed by the city's General Fund. Assured Guaranty disputes whether Stockton should be in bankruptcy court and has said it intends to "vigorously enforce" its rights as a creditor in Chapter 9 proceedings, including its right to contest the city's eligibility for bankruptcy and any plan of adjustment it considers unfair.