Calif. city's lawmakers ready bankruptcy plan

A California city that has the second-highest foreclosure rate in the nation is preparing for a possible bankruptcy filing if officials are unable to broker a deal with the city

A new program will allow homeowners who are 90 or more days overdue on their monthly mortgage payments to be given the opportunity to put the foreclosure process on pause for 30 days while lenders try to work out a way to make the mortgage more affordable to the homeowner. (AP/Stockton Record)

STOCKTON, Calif. (AP) — A California city that has the second-highest foreclosure rate in the nation is preparing for a possible bankruptcy filing if officials are unable to broker a deal with the city's creditors.

Stockton would become the nation's largest city ever to file for bankruptcy. City Council members late Tuesday granted the city manager authority to seek Chapter 9 bankruptcy protection in three weeks if a deal isn't made.

The council's 6-1 vote after four-and-a-half hours of urgent pleas, recriminations over past decisions and dire warnings comes as the river port city of 290,000 continues to negotiate to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy.

The mediation was extended through June 25, and City Manager Bob Deis said he wanted to be ready to go to bankruptcy court the next day in case the talks fail.

"If a positive resolution is not possible, it is my fiduciary responsibility, just like a small business owner or the CEO of a Fortune 500 company, to have a Plan B. It's not all right to simply not do anything and hope for the best," Councilwoman Diana Lowery said. "There is no hoping for the best anymore."

Stockton's property tax, sales tax and other revenues have seen significant declines in recent years while expensive investments the city made in reinvigorating the downtown failed to produce the desired windfall. At the same time, it negotiated generous retiree benefits it cannot afford to make good on, said Ann Goodrich, a labor consultant hired by the city.

The insolvent city already has depleted its general fund, defaulted on bank bonds and slashed essential services and maintenance to dangerous levels, Deis said.

The city has the one of the highest crime and unemployment rates in the country. At City Hall itself, the water is undrinkable, rats roam the building, the computers are outmoded and workers are demoralized, he said.

"There have been unacceptable mistakes in this city, and I'm concerned about making more mistakes, and one of these days it's going to be a catastrophic mistake," he said.

Adding to the urgency is the fact that the city is facing a $26 million deficit in the fiscal year that begins July 1, but is required under state law to have a balanced budget.

Under the law city officials are using as a last-ditch effort to avoid bankruptcy, municipalities must first seek mediation with creditors, with the goal of settling debts without filing for Chapter 9 protection.


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