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Stockton, Calif., set to become the largest American city ever to declare bankruptcy



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Under a bankruptcy filing, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city’s debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton.

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

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"One of the reasons a city might want to go the bankruptcy route is that they don’t want a situation where they have to pay out debts and have to close the police or fire department," Benedetti said. "Filing for Chapter 9 means you’re asking the court to protect you against lawsuits from people who hold your debt."

Stockton’s bankruptcy would make it the largest city by population to file for Chapter 9 protection, according to Jim Spiotto, a Chicago bankruptcy lawyer who tracks such cases. He said Bridgeport, Conn., was the largest city to file for bankruptcy, which it did in 1991, followed by Vallejo, Calif., which filed in 2008.

Jefferson County in Alabama is the largest local government bankruptcy filing to date in terms of the size of its debt. It occurred in November 2011 and was followed by Orange County, Calif., in 1994.

Experts say the bankruptcy filing, while protecting the city from catastrophe in the short run, should not be seen as Stockton’s panacea.

"Bankruptcy won’t take away Stockton’s underlying financial problems, one of which is the economy, the high unemployment rate and the high foreclosure rate," Benedetti said. "It will take years for them to come out of this."

Stockton was the first city to test a new state mediation law, which is less than 6 months old.

Under the law, municipalities considering bankruptcy must first negotiate behind closed doors with creditors for up to three months, with the goal of settling debts without filing for Chapter 9 protection.

The city spent $3 million on mediation with creditors that included Wells Fargo & Co., the California Public Employees’ Retirement System, labor groups, and major bondholders.


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Stockton officials have said that even with a bankruptcy, they are optimistic. They point to Vallejo, which emerged from bankruptcy last year.

"Vallejo is leaner, smarter and they’ve got the confidence of their citizenry," Deis said. "I think Stockton will be doing the same."



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