There was no midnight hour deal to be had between the city of Stockton, California and its creditors, and it has earned the dubious distinction of becoming the largest city-based municipal bankruptcy filing in U.S. history.

Representatives for the city officially filed for Chapter 9 protection in federal court in the state capital, Sacramento, late Thursday. The deadline for negotiations between city lawmakers and creditors designed to avoid the largest city bankruptcy filing in U.S. history came and went earlier this week without a solution, as expected. Moreover, on a 6-1 vote similar to one the Stockton (CA) City Council gave to approve a measure three weeks ago to authorize its city manager prepare its Chapter 9 petition, the council passed its Pendency Plan, essentially a budget to provide for daily operations while the city is in bankruptcy. The biggest cuts will be to retired pensioners, namely their medical benefits.

“This is the most difficult and heart-wrenching decision that we have ever been faced with; we must take action to protect the health, safety and welfare of the entire city and begin the recovery process,” said Mayor Ann Johnston.

The city, which boasts a large number of retiree entitlements and the second-highest foreclosure rate among U.S. cities, and its creditors, not coincidentally including a public retirees union and Wells Fargo, had gone through extensive negotiations. The 2011 California law’s requiring such mediation before an official filing aimed at keeping struggling municipalities from hastily entering into a Chapter 9. There was hope the law’s mandated negotiations were close to yielding a positive result in Stockton, which could become a bellwether case, but talks fell apart.

Stockton is among many U.S. cities, including several in California, struggling to get out of crushing debt wrought by expensive union contacts and retiree entitlements as well as tax base shrinkage caused by the real estate collapse. NACM contributors like Bruce Nathan, Esq., of Lowenstein Sandler PC, have been saying for the better part of a year that a wave of Chapter 9 filings would not be a shock and that creditors owed substantial debts by struggling municipalities needed to start preparing for worst case scenarios: more Chapter 9 filings.

- Brian Shappell, CBA, NACM staff writer