As we mentioned earlier this week, the city of Stockton, Calif., which some consider to be ground zero for the housing market crash, was trying to reach a last-minute deal with creditors to prevent the town from declaring bankruptcy. Unfortunately, those talks failed and Stockton is set to take over the title of Largest U.S. City to Go Bankrupt.
“Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency,” the City Manager announced at a City Council meeting on Tuesday night. “We think Chapter 9 protection is the only choice left. If we get any agreements, those will be honored in Chapter 9.”
In 2007, Stockton was among the first cities to experience massive foreclosures as lenders began to crank up interest rates on all the adjustable-rate mortgages given to subprime lenders in the preceding years. In the course of one year, the foreclosure rate in Stockton jumped from 1-in-157 homes (the 15th-highest rate in the country) to 1-in-27 (the highest rate in the nation at the time).
The rash of foreclosures have led to a huge drop in property tax revenue for the city of around 290,000 residents. The problem has only been compounded by the generous retirement benefits being paid to former city employees. In all, Stockton currently faces a $26 million deficit, reports the AP.
The City Council now needs to begin paying down by slashing the municipal budget. Cuts since 2007 have already eliminated a quarter of Stockton’s police officers, one-third of the fire department, and 40% of all other city employees.
The city say the bankruptcy budget will not make any further cuts to fire and police services.
“The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation,” said the City Manager. “Bankruptcy provides the equivalent of a pause button. It retains services and provides structure so you don’t have a bunch of lawsuits.”
The AP reports that Bridgeport, CT, has held the title of largest U.S. city to declare bankruptcy since 1991.