- Associated Press - Wednesday, June 27, 2012

STOCKTON, Calif. (AP) — In opting to become the nation’s largest city to seek federal bankruptcy protection, this river port of 290,000 took a rare financial step of last resort after struggling with the economic downturn, soaring pension costs and contractual obligations.

Thirteen cities, counties and other government entities filed for bankruptcy protection last year — the highest annual level in nearly two decades. Stockton was the seventh U.S. municipality to file this year and the first California city since Vallejo, which sought protection in 2008, according to James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies.

“Filing bankruptcy is time-consuming, expensive and complicated,” said Mr. Spiotto, noting that Vallejo spent millions of dollars alone on attorneys and other bankruptcy professionals. “And you never get the results you desire.”

That’s why experts are divided on whether other financially struggling cities, towns and other government entities will follow Stockton into bankruptcy court. Mr. Spiotto said it will be hard and expensive for Stockton to obtain financing.

Others say bankruptcy comes with nonmonetary costs, too.

“Being in bankruptcy is decimating to your staff and morale,” said Deborah Lauchner, Vallejo’s finance director. “There’s so much uncertainty. … We’ve been taken apart and ripped by the seams, and everybody examined us.”

Since Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, some 640 government entities have filed. Last year’s 13 filings almost doubled the six filed in 2010. That was the most since an equal number were filed in 1994.

By comparison, roughly 1.5 million Americans file for personal bankruptcy a year while some 50,000 companies file for business bankruptcy.

“Bankruptcy is a huge drain on municipalities because they have limited ways to create more revenue,” said Los Angeles bankruptcy lawyer Karol Denniston.

Stockton City Manager Bob Deis said officials were left with little choice but to recommend bankruptcy after failing to hammer out financial agreements with creditors to address the city’s $26 million budget shortfall.

“Unfortunately, we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency,” Mr. Deis said at the City Council meeting Tuesday night. He said, however, that the city  still was negotiating with some creditors and could reach deals with as many as one-third of them.

“We think Chapter 9 protection is the only choice left,” Mr. Deis said. “If we get any agreements, those will be honored in Chapter 9.”

The City Council on Tuesday voted 6-1 to adopt a special bankruptcy budget to address Stockton’s $26 million shortfall if the city files for bankruptcy, as expected, by Friday.

The city has been hit hard by high crime and the collapse of the housing market in the past three years. It’s also dealt with $90 million in deficits through a series of drastic cuts.

The new budget did not call for additional service cuts beyond those that earlier slashed the police force by one-fourth, the fire department by one-third and 40 percent of other city employees, along with wages and medical benefits.

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