(Reuters) – Stockton, California, the largest city in the United States to ever file for bankruptcy, could create a new template for struggling cities and potentially lift the stigma that scars municipalities if they seek court protection from creditors.
If Stockton, which filed for Chapter 9 municipal bankruptcy on June 28, can reach consensus with its creditors and craft a plan to exit bankruptcy quickly others may follow suit, legal experts said.
“Successful cases breed more filings,” said Andrew Glenn, a bankruptcy partner in New York at Kasowitz Benson Torres & Friedman. “Municipalities watch these cases closely around the country, and once the template is set up, if other towns have these problems, they’re going to follow the template.”
Other cities and counties have gone bankrupt because of a bad investment or ill-conceived public works project, like the sewer system that sank Jefferson County, Alabama, into $3.14 billion of debt.
But Stockton may be a new breed of failing city, swamped by routine costs, pension payments, a payroll for city employees, a years-long economic slide and depressed housing tax receipts – the same issues that currently face many other cities still struggling to recover from the cavernous U.S. recession.