Thursday, June 28, 2012

Turn On The Lights, Watch The Roaches Scatter, Part 88

The US city hit hardest by the subprime/foreclosuregate crisis, Stockton, California, is now facing the largest civil bankruptcy filing in America's history.

Officials said Tuesday that Stockton would become the nation's largest city to seek protection under the U.S. bankruptcy code.

The city stopped making bond payments, and City Manager Bob Deis said he expected to file bankruptcy papers immediately.

Stockton has been in negotiations with its creditors since late March under AB 506, a new California law requiring mediation before a municipality can file for reorganization of debt. It was the first use of the law, and policy analysts who watched its torturous and tedious progress have titled their report on it "Death by a Thousand Meetings." Mediations ended Monday at midnight.

Recent council meetings have been contentious. Tuesday night's meeting was quieter, with an evident sadness on faces in the packed audience. Many residents said they were there mostly to hear for themselves that the day so long expected had finally come.

"It's a seminal moment in this city's history and I needed to be here," said Dwight Williams, who runs a nonprofit housing organization. "I can't just read about this in tomorrow's paper. I need to hear for myself if there is some inkling as to where we go from here."

People outside the state forget given all of California's big cities that Stockton has 300,000 people, making it a larger city than Lexington, KY, Baton Rouge, LA, and Springfield, MO and roughly the same size as Cincinnati, Toledo, or Buffalo proper.  That makes this bankruptcy a serious deal.  The city deciding to stop bond payments is just staggering, it's basically surrender to the creditors at this point.  So what happens to Stockton now?

The city made $90 million in drastic cuts from the general fund in the last three years, including reducing the Police Department by 25%, the Fire Department by 30%, and cutting pay and benefits to all employees. There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame.

The blame will go around for years here.  And down the road I foresee a city larger than Stockton going under as well.  Who knows.  The housing market is showing signs of recovery again, but it did that two years ago before falling another 10%, and the backlog of foreclosures is still absolutely massive.  There's no lasting recovery until that backlog goes away folks, and more Stocktons will follow as sure as night follows day.

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