Stockton California has been facing tough financial decisions for some time. As city officials inch closer to a Chapter 9 municipal bankruptcy filing, their efforts are being put on hold as the result of a new law. Now forced into a mandated mediation period, the city is working towards a plan that will consider alternatives before the filing can proceed.
Not So Fast
A new California law, Assembly Bill 506, requires that cities attempt to work out their financial troubles before filing for bankruptcy. According to AB506, cities cannot file for Chapter 9 until they have entered a 60-day mediation period with creditors. After the mediation period, the city must receive approval from the mediator in order to be allowed to proceed with the bankruptcy filing.
Now that Stockton is in the mediation process, city leaders met last week to discuss possible bankruptcy alternatives that could reorganize debts and clean up their finances. The obvious items topping the list are reducing the city’s budget and expenses by negotiating with creditors and cutting some city services. With debts exceeding $700 million, the state is looking to renegotiation its largest debt source of $417 million, a city retiree health care obligation. However, this obligation stands as part of union benefits, which would only be eligible for revision or cuts if a bankruptcy judge approves.