The Wages of Bankruptcy: Stockton’s Cautionary Tale for Detroit

At night, Stockton, Calif., becomes a ghost town. Streets lined with boarded-up buildings and rubbish-strewn parks are mostly empty except for drug dealers and their customers, says Dave Macedo, president of the local firefighters’ union. Even in daylight, shootings break out with regularity, and the city of 300,000 was ranked the 10th most dangerous in the country in 2012. “It’s the wild, wild West out there,” says Macedo. Or rather, the wild, bankrupt West. When Detroit filed for Chapter 9 protection on July 18, it became the largest American city to ever declare bankruptcy. The progress of the city it replaced in the record books offers some clues about what Detroit will be facing in the coming months and years. Just over a year after seeking bankruptcy, Stockton is struggling with protracted court battles and stripped city services with little relief in sight. After its June 2012 filing, Stockton’s first hurdle was proving itself eligible for the process: in order to be declared legally bankrupt, the city had to demonstrate to Judge Christopher Klein that it was insolvent and had attempted to negotiate its debts in good faith. City bankruptcy attorney Marc Levinson described the court battle as an unfortunate precursor to the real show. “We spent an awful lot of time, and an awful lot of money, just trying to stay in bankruptcy,” Levinson says. Finally, after nine months of eligibility battles and against creditors’ vehement objections, Judge Klein determined on April 1 that Stockton was insolvent. Winning the eligibility battle only set the stage for a larger war. The biggest chunk of Stockton’s debt is the $900 million owed to CalPERS, the California Public Employees’ Retirement System, a statewide pension service. (MORE: Pittsburgh’s Lessons for Detroit) But Wall Street creditors and unsecured private creditors also expect Stockton to fulfill its obligations to them, and they say it’s unfair for pensioners to get preferential treatment. Also at play is a conflict between federal and state law: while California requires Stockton to pay CalPERS, federal law allows it to renege … Continue reading The Wages of Bankruptcy: Stockton’s Cautionary Tale for Detroit