City vs. Bankruptcy: Can Mediation Work?

A large city (pop. 300,000) in California's San Joaquin Valley recently moved a step closer to becoming the nation's largest city to declare bankruptcy.

In an effort to avoid that distinction, mediation has begun with public employee unions and major bond creditors to restructure its finances. Stockton is facing a budget deficit of $20-to-almost-$40 million, after a fiscal emergency three years running. Under California's current law, cities must hire a third-party mediator to help negotiate with unions and debtors for a period of 90 days before declaring Chapter 9 bankruptcy.

Stockton will be the first to test the new procedure, a union-backed California law enacted last year making it more difficult for cities to declare bankruptcy. The law requires municipalities within the state to declare a fiscal emergency or participate in a 60-day mediation process with creditors before seeking bankruptcy protection. Stockton has already declared two fiscal emergencies in the past few years, and is hoping to avoid the pitfall of having to shell out millions of dollars in legal fees for itself and its creditors.


Bookmark & Share