The Largest Municipal Bankruptcy in American History
Near Stockton, California
On June twenty-eighth, twenty twelve, the city of Stockton filed for Chapter Nine bankruptcy protection in federal court. At that moment, it was the largest American city ever to file for municipal bankruptcy.
The causes had accumulated over more than a decade. Through the nineteen nineties and early two thousands, city officials had approved generous fringe benefits and pension commitments to municipal employee unions in rounds of contract negotiations that assumed property tax revenues would grow indefinitely. They did not. When the two thousand eight financial crisis hit, Stockton's real estate market, already fragile from years of over-leveraged development in the inland empire of the Central Valley, collapsed. Home values fell by more than half. Property tax receipts fell with them. The obligations did not.
By twenty twelve, Stockton was carrying bond debt and pension commitments it could not service. The city had already cut more than a fifth of its police force and cut fire department staffing to minimum levels. Basic services were being rationed in ways that made themselves felt block by block.
The bankruptcy proceedings were legally complicated. Creditors contested the city's eligibility. CalPERS, the state pension fund, argued that pension obligations were untouchable. A federal judge ruled in April twenty thirteen that Stockton was eligible for bankruptcy protection. In October twenty fourteen, the judge approved a recovery plan that protected pension payments to retirees while imposing losses on bondholders.
Stockton emerged from bankruptcy on February twenty-fifth, twenty fifteen. Voters had already approved a sales tax increase in November twenty thirteen to fund the exit.
Detroit filed for bankruptcy in July twenty thirteen, a year after Stockton, and it soon eclipsed Stockton as the largest city ever to file. The distinction hardly felt like a relief.
