Jonathan J. Higuera

How low can you go

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Phoenix may have taken it on the chin during the housing crash and subsequent recession but one need look no further than Stockton, California, to get an idea of how bad it could have been.

In June, Stockton became the largest city ever to file for bankruptcy in U.S. history. Critics charge that the bankruptcy was the result of years of fiscal mismanagement and a housing market crash that left its coffers dry, unable to pay its workers, pensioners and bondholders.

The filing by the city of 300,000 people followed three months of confidential talks with its creditors aimed at averting bankruptcy. The Chapter 9 bankruptcy filing, a rare event for U.S. municipal debt issuers, was left as the only option to close a deficit of $26 million in Stockton’s budget for the new fiscal year, according to city officials.

Stockton’s list of major unsecured creditors included the California Public Employees’ Retirement System, which manages Stockton’s pension plan. The retirement system has a $147.5 million claim for unfunded pension costs.

Other top creditors include investors holding $124.3 million of Stockton’s pension obligation bonds, $40.4 million of the city’s variable rate demand obligations, $35.1 million of the city’s public facilities fees bonds and $31.6 million of the city’s parking garage debt.

Stockton becomes the nation’s most populous city to file for Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the biggest municipal bankruptcy in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011. Stockton has about $700 million in bond debt.

“We are extremely disappointed that we have been unable to avoid bankruptcy,” Mayor Ann Johnston said in a statement. “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens.”

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