SACRAMENTO (AP/CBS13) — A judge accepted the California city of Stockton’s bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy.

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.

The city’s creditors wanted to keep Stockton out of bankruptcy — a status that will likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

“What Chapter 9 did was basically push the reset button or the pause button, no more cuts needed,” City Manager Bob Deiscity said of the ruling.

Attorneys for the city said Stockton’s budget and services had been cut to the bone.

“There’s nothing to celebrate about bankruptcy,” said Deis. “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.

Now, the city is working on a plan of adjustment — or bankruptcy exit plan. Stockton will continue to negotiate deals with its largest creditors in hopes of avoiding repayment of its debts in full.

“We negotiate, we’ve already negotiated 10 deals. We have a handful more and look forward to that opportunity,” said Deis.

However, that might not be easy since failed negations in the mediation process led to a face-off with creditors in bankruptcy court.

Some creditors are not happy the city didn’t raise taxes to bring in more revenue or make cuts to CalPERS’ pension plans.

“It is behind us. We look forward to looking to the financial creditors on negotiating a plan of adjustment,” said Deis.

The Chapter 9 process is proving to be costly for the city. Stockton hired bankruptcy attorney Marc Levinson. So far the fight in court has cost the city almost $7 million.

“Now it’s the question of, we have so much money to spend, how can we spend it, make deals and get out of bankruptcy, and stop spending money on me and start spending money on creditors and safety officers alike,” said Levinson.

Deis hopes the city can come up with a bankruptcy exit plan in three to five months.

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.

The creditors who challenged Stockton’s bankruptcy petition are the bond insurers who guaranteed $165 million in loans the city secured in 2007 to pay its contributions to the CalPERS pension fund. That debt got out of hand as property tax values plummeted during the recession, and money to pay the pension obligation fell short.

Legal observers expect the creditors to aggressively challenge Stockton’s repayment plan in the next phase of the process.

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.

The Associated Press contributed to this story.


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