Breaking news about the possible Stockton city bankruptcy.

Would it Make Fiscal Sense?

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This posting is reproduced from the Stockton Record dated February 24, 2012

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Bankruptcy for Vallejo was a messy, demoralizing ordeal that saw an exodus of city employees and left residents without enough fire fighters and police officers to protect them.

But it penciled out financially, said Deborah Lauchner, Vallejo's financial director for the last 10 months.

"With bankruptcy, everything we had got studied, reviewed, torn apart and ripped open," Lauchner said Thursday. "We didn't really have a lot of options. We were going to run out of cash."

Stockton city officials are expected Tuesday to consider taking the first step down the road of bankruptcy.

If bankruptcy ultimately happens, Stockton would be the largest city in the nation to seek Chapter 9 protection.

Councilman Dale Fritchen offers an argument against bankruptcy, saying that Stockton - like Vallejo - will pay lawyers more than it could save.

Lauchner said that's not necessarily so.

Since 2008, she said Vallejo has paid attorneys $12 million. But those attorneys were able to write $480 million in debt down to $6 million in bankruptcy court.

"The return on investment was pretty good in that sense," she said.
Stockton, running short on cash and wondering where to turn next to balance the municipal budget, may take the same path as Vallejo.

City Manager Bob Deis will provide an overview of the city's finances during a news briefing today. This will be his first public statement since word leaked Wednesday that Stockton may seek bankruptcy protection.

At a City Council meeting scheduled for Tuesday, Deis is expected to ask council members to vote on entering a mediation period with the city's major creditors.

The mediation stage is part of a new law enacted Oct. 9 by Gov. Jerry Brown. It is designed to keep California cities from entering bankruptcy.

Vallejo, which emerged from bankruptcy Nov. 1, was able to pay all of its debtors, who had loaned the city money on the municipal bond markets, Lauchner said.

Fritchen, who intends vote against Stockton seeking bankruptcy protection, has said that Deis wishes to use Chapter 9 to fend off debt holders and to reduce the city's health-care arrangement with its retirees.

Those unseen bondholders run the gamut from the rich to mom-and-pop investors. Municipal bonds are attractive over corporate investments because in California the holders don't pay personal income tax on the earned interest.

As for the personal wreckage of bankruptcy, Lauchner said Vallejo police and firefighters staffing was reduced by more than half. Other city leaders came and went.

"The morale, the uncertainty, we had a lot of people leave," she said. "We lost a lot of our brain trust because they were afraid of what was going to happen. We're trying to rebuild."

 

For more stories related to this topic see: Stockton Bankruptcy First Step Likely and Stockton City Manager Seeks New Authority in Wake of Bankruptcy.

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Scott Smith is a Staff Writer at the Stockton Record.
Visit his blog at recordnet.com/smithblog.
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