Stockton, California Chapter 9 Filing - Another Outlier, Or Harbinger?

Stockton, California Chapter 9 Filing - Another Outlier, Or Harbinger?

Meredith Whitney, one of the first financial analysts to foresee the collapse of the housing market, famously predicted in December 2010 that a wave of municipal bond defaults was on the way. The wave, however, has yet to materialize, and the bankruptcy filing of Stockton, California will likely not change this.   

As with the chapter 9 filing of Jefferson County, Alabama last November, Stockton's filing will probably not portend an upsurge of municipal bankruptcies. Stockton and Jefferson County are outliers, facing dire circumstances caused by extreme combinations of terrible decisions and bad luck. While a great number of cities and towns are facing rising pension costs and substantial bond debt, the ignominy and high costs of bankruptcy will continue to make it an absolute last resort for distressed municipalities

In most instances, the mere threat of default, bankruptcy and fiscal collapse will help most of the distressed cities and counties throughout the United States to find the means and political will to address their issues outside of court. Far more likely to trigger a wave, for example, are the recent successful efforts of Providence, Rhode Island. There had been much talk about Providence possibly seeking bankruptcy protection, but it has recently obtained substantial pension concessions from its unions and retirees, and additional voluntary payments into city coffers from tax-exempt Brown University, deals that will go far towards restoring the city to fiscal health.     

The sheer number of troubled municipalities facing extraordinary fiscal pressures will invariably lead to some increase in chapter 9 bankruptcies, but such cases will continue to be the exceptions rather than the rule.

Read this article in its entirety at Kelley Drye & Warren LLP's Bankruptcy Law Insights blog

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