By Ryan C. Wood

Lately there has been a wave of new bankruptcy filings from municipalities in California.  Stockton filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code, Bankruptcy Case number 12-32118, on June 28, 2012. Mammoth Lakes also filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code, Bankruptcy Case number 12-32463, a few days later on July 3, 2012.  These bankruptcy filings leave many people wondering what happened with these towns.

Stockton

The city of Stockton has been in a decline for the past several years.  In its court documents, the City of Stockton has indicated they depleted their reserves and tried everything in their power to avoid filing for bankruptcy.  Stockton faces a growing deficit for the 2012 – 2013 fiscal year.  After reviewing the list of the city’s 20 largest unsecured creditors, it becomes very obvious that the biggest contributor to the city’s decline is the massive pension costs.  Their largest creditor is the California Public Employees Retirement System (CalPERS). CalPERS provides retirement benefits to public employees. CalPERS is owed $147.5 million.  Wells Fargo comes in a close second with a claim of $124.3 million. The debt owed to Wells Fargo is for pension obligation bonds which were used to fund the public pension plans.

Another factor in their financial crisis is the poor housing market and economy.  With housing values still heavily depressed in Stockton the city’s property tax revenues have decreased significantly.  Stockton also has a very high foreclosure rate, so property tax revenues have not yet recovered.

The city is in a very tough position and is essentially stuck between a rock and a hard place.  If they cut down the pension costs they lose the trust of their current and retired employees.  Most retired employees rely on their pension benefits to live and may not have any other sources of income.  If even a small portion of their benefits are cut it may be detrimental for the retired employees.

In many ways the city of Stockton reflects many consumers’ lives.  They are caught up with debts they cannot repay and houses that are significantly underwater.  Like the city of Stockton sometimes the only way out of the debt is to file for bankruptcy protection.

Mammoth Lakes

Mammoth Lakes chose to file for Chapter 9 bankruptcy protection to restructure the town’s obligations. According to the bankruptcy filings Mammoth Lakes tried the mediation process prior to bankruptcy.  However, the town’s largest creditor, Mammoth Lakes Land Acquisition, did not participate in the mediation process.  Mammoth Lakes Land Acquisition was granted a judgment for $42.7 million against Mammoth Lakes for a breach of contract lawsuit.  The next largest creditor is CalPERS with a claim for $4.2 million. The drastic difference between the largest creditor and second largest creditor provides some insight into why filing for bankruptcy protection was necessary after Mammoth Lakes Land Acquisition refused to participate in the mediation process.

The bankruptcy filings of both Stockton and Mammoth Lakes just go to show that municipalities, like normal everyday consumers, are not immune to bankruptcy.  Life can be going great and then a major life changing event can happen in a moment’s notice.  Events such as a loss of a job, mortgage payments increasing, or having lawsuits filed against you can make your finances come crashing down.