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Stockton to be largest US city to file bankruptcy; special budget passed

A banner for the city of Stockton, Calif. is shown in this undated file photo.
June 27, 2012 12:00:00 AM PDT
Stockton is set to become the largest U.S. city to declare bankruptcy after a vote approved a special bankruptcy budget.

City officials say mediation with creditors has failed despite a new state law, designed to help local governments avoid bankruptcy.

The city council voted 6-1 Tuesday night to approve a special bankruptcy budget to offset next year's projected $26 million deficit.

The budget suspends any payments for debts and legal claims. It also cuts pay and benefits for city employees and retirees.

Stockton, which carries a population of 290,000, is the seventh U.S. municipality to file this year and the first California city since Vallejo, which sought bankruptcy protection in 2008.

Thirteen cities, counties and other government entities filed for bankruptcy protection last year - the highest annual level in nearly two decades.

James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies, said Vallejo spent millions of dollars alone on attorneys and other bankruptcy professionals.

"Filing bankruptcy is time-consuming, expensive and complicated," said Spiotto. "And you never get the results you desire."

Since Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, some 640 government entities have filed. Last year's 13 filings almost doubled the six filed in 2010.

Stockton City Manager Bob Deis said city officials didn't have many other options than to recommend bankruptcy after failing to hammer out finance agreements with creditors to address the city's budget shortfall. The city has been hit hard by a high volume of crimes and the collapse of the housing market in the past three years. It has also dealt with $90 million in deficits through a series of drastic cuts.

The new voted-in budget did not call for additional service cuts - the police force has already been cut by one-fourth, the fire department by one-third and other city employees by 40 percent. The new budget would suspend payments for debts and legal claims; reduce payments for retiree medical benefits; further cut some pay and benefits; and increase revenue through code enforcement and parking citations.

A judge would decide which creditors should be paid, how much and in what order and would make allowances for expenditures needed by the city to function. It would be up to city officials to decide how to spend that money.

The city is set to officially file for bankruptcy by Friday.

The Associated Press contributed to this report.


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