One of the most dangerous cities in America has just declared bankruptcy, leaving creditors out hundreds of millions of dollars.
U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services.
“It’s apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law,” Klein said.
The city of nearly 300,000 people has become emblematic of government excess and the financial calamity that resulted when the nation’s housing bubble burst.
Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city’s tax base.
Attorneys for the city said the city’s budget and services had been cut to the bone.
“There’s nothing to celebrate about bankruptcy,” said Bob Deis, Stockton’s city manager. “But it is a vindication of what we’ve been saying for nine months.”
The Chapter 9 bankruptcy case is being closely watched nationally for potential precedent-setting implications.
The $900 million that Stockton owes to the California Public Employees’ Retirement System to cover pension promises is its biggest debt. So far Stockton has kept up with pension payments while it has reneged on other debts, maintaining that it needs a strong pension plan to retain its pared-down workforce.
By 2009 Stockton had accumulated nearly $1 billion in debt on civic improvements, money owed to pay pension contributions, and the most generous health care benefit in the state—coverage for life for all retirees plus a dependent, no matter how long they had worked for the city.
Creditors, who invested tens of millions of dollars into city bonds to help cover pension payment shortages have been left holding the bag. And now, with the city officially bankrupt, even those pensions are under threat.
Stockton is the first of many large cities that will soon declare bankruptcy, with more troubled local city councils likely to seek bankruptcy protection in the near future.
Like many indebted citizens of America, the Stockton government based their salaries, pensions and city development plans on the notion that economic growth could never end.
Their plan worked until it didn’t.
This is only the beginning.
First, we’ll see major cities across America lay off hundreds of thousands of employees, a trend that has been gaining momentum over the last several years.
Then, entire States, likely starting with California, Illinois, and New York, will fall under the weight of billions of dollars in debt. They will turn to the Federal government, who will happily engage the Federal Reserve to print more Bernanke Bucks to bail them out.
Finally, the United States of America, in its entirety, will succumb to what can only be described as the largest sovereign debt collapse in the history of the world.
The implications will be severe as the paradigm of peace and prosperity Americans have come to know will turn to riots, starvation and bloodshed.
There is no stopping this. The debt loads on every level of government have become wholly unsustainable.