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What Stockton's Bankruptcy Means for Residents

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By Andrew Lu on April 02, 2013 9:54 AM

The city of Stockton, California, is eligible for bankruptcy protection, a federal judge has ruled. The ruling rejected creditors' arguments that the city was not truly insolvent when it sought protection and failed to seek pension concessions.

The city fully paid its obligation to California's retired workers pension system, but imposed losses on bondholders and bond insurers, reports Reuters.

Stockton will now be permitted to file for Chapter 9 bankruptcy, making it the largest U.S. city ever to file for municipal bankruptcy. But what is Chapter 9, and how will it affect residents?

Municipal Bankruptcy

Chapter 9 bankruptcy is a unique type of bankruptcy that only applies to reorganization of municipalities such as cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.

The purpose of Chapter 9 is to protect a financially distressed municipality from its creditors while the municipality develops and negotiates a plan for adjusting its debts. Typically, a municipality reorganizes its debts by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan, according to the United States Courts.

While a Chapter 9 bankruptcy is in some ways similar to a personal bankruptcy, municipal bankruptcy differs as there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. That's because such liquidation would violate the Tenth Amendment to the Constitution and its reservation to the states of sovereignty over their internal affairs.

What Municipal Bankruptcy Means for Residents

Some of the immediate repercussions of Stockton's bankruptcy include that retired city workers will have to start paying for lifetime medical benefits for themselves and their spouses. They had been receiving those benefits for free, Stockton's vice mayor told Marketplace.

However, for residents in general, it is expected that Stockton will be able to maintain its current level of services, and will not have to institute any further cuts to its police force or fire department.

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