Stockton California: Belly Up

June 28th, 2012
in econ_news

Econintersect:  That is belly up as in bankrupt.  Reports tonight indicate that the central California city of 292,000 residents will become the largest U.S. judge-gavelSMALLcity ever to default on its debt.  In addition, bankruptcy proceedings could also result in major cost savings on employee pay and benefits.  The Stockton city council approved a resolution Wednesday by a vote of 6-1 that declared the city fiscally insolvent and proscribed the filing of Chapter 9 bankruptcy protection.  There have been at least two larger municipality bankruptcy filings, but they were counties.  In 2011 Jefferson County Alabama set a new Chapter 9 record with a $4.23 billion default and Orange County California defaulted on $1.5 billion in 1994Click on graphic to see judge in action.

Follow up:

Both of those county defaults involved corruption.  And both involved activities that have been alleged to have fraudulent:  JP Morgan (NYSE:JPM) has been implicated in the Jefferson County case which has seen local politicians sent to prison and a rogue trader-county treasurer (Robert Citron) was involved in the Orange county case.

The amount potentially involved in the Stockton filing may be of the order of $25 million or more.  This amount pales in comparison to the two huge county defaults mentioned, but is much larger than the usual few million dollars or less involved in many of the hundreds of municipal bankruptcies filed over the years.

According to a Bloomberg article by Steven Church and Alison Vekshin, Stockton’s budget for the fiscal year starting July 1 calls for defaulting on $10.2 million in debt payments and cutting $11.2 million in employee pay and benefits as part of the action to close a $26 million deficit.

It is not clear exactly how many municipal bankruptcies have occurred over the 65 years that the code has been in place.  Wikipedia says there have been about 640 as of June 2012 and Reuters says there were 624 as of August 2011.  The number 500 that has been widely mentioned in numerous press stories in the past 24 hours appears to have come from out-of-date Wikipedia references.

Stockton may not be the only bankruptcy forthcoming.  From Michael Connor at Reuters:

Roughly 90,000 U.S. cities, counties, towns and other local governments are still battling fallout from America's Great Recession, which ran from December 2007 through June 2009.

Beyond Detroit and other high-profile governments mired in financial crises, institutional investors, traders and analysts worry that Providence and Woonsocket in Rhode Island and Scranton, Pennsylvania, may also be at risk.

Moody's Investors Service focused heavily on local governments in Michigan, Rhode Island, New York and New Jersey last fall when the credit rating agency published a list of speculative-grade credits, including Camden and Salem in New Jersey, and the Philadelphia School District.

Moody's cited high unemployment in New York's Gloversville, and several years of budget deficits in East Greenbush, a suburb of New York's capital of Albany.

John Lounsbury


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