SAN FRANCISCO, June 25 (Reuters) - Stockton, California was at risk on Monday of becoming the largest U.S. city ever to file for bankruptcy as the clock ticked down toward the midnight deadline of talks with creditors.
If Stockton, home to a population of 292,000 about 85 miles east of San Francisco, fails to win concessions in the talks to close a $26 million shortfall for the fiscal year beginning on July 1, City Manager Bob Deis will soon seek protection from creditors with a rare Chapter 9 bankruptcy filing.
On Tuesday evening the city council will vote on a so-called pendency plan budget crafted by Deis to guide the city's finances during bankruptcy proceedings.
The plan would suspend $10.2 million in debt payments and reduce spending on employee compensation and retiree benefits by$11.2 million. It will also probably trigger rating agencies to further downgrade the city.
Former city manager Dwane Milnes, who represents retired city employees, showed little faith in a last-minute breakthrough in the confidential mediation between Stockton and its creditors that has being going on for the last three months.
"My sense is that they'll go ahead and adopt the pendency plan," said Milnes, adding that talks have been particularly difficult with 18 different parties negotiating with the city. "I would be surprised if they get everybody in the tent."
The mediation was required by a state law approved after the bankruptcy of Vallejo, California in 2008.
Stockton spokeswoman Connie Cochran declined to comment on the talks but said they could press on informally even after mediation concludes.
Stockton has already defaulted on about $2 million in debt since February, requiring it to surrender a building once slated to be its future city hall and three parking garages to the trustee for one its bond insurers.
The intentional default and prospect of bankruptcy have prompted Moody's Investors Service and Standard & Poor's Ratings Services to drop their credit ratings on Stockton, which has more than $700 million in debt across its various agencies.
Moody's since February has cut its issuer rating for Stockton to a junk level Ba2 from Baa1 while S&P has dropped its issuer rating on the city from BB to SD, one notch above its D default rating.
Gregory Lipitz, a vice president and senior analyst at Moody's, said a bankruptcy filing by Stockton is a "high-probability event."
A major area targeted for savings in the pendency plan is Stockton's compensation for city employees and retired city workers.
The plan would cut roughly $7 million by reducing for one year and then phasing out retiree medical benefits. Stockton officials have repeatedly said retiree medical benefits represent a crushing expense for the city due to their rising cost and their projected liability of $417 million.
That spending and bond payments are on the chopping block because city officials fear cutting deeper into public safety spending due to a spike in crime and because so much other city spending has been sharply cut in recent years, said Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton.
"It's definitely about sharing the pain a little more broadly," said Michael. "Up until recently there has been no real impact on the retirees or bond creditors ... The employees and the citizens have been bearing all of the pain."
Stockton's finances collapsed along with its housing market, and despite slashing $90 million in spending in recent years and cutting a quarter of positions across its agencies, the city's finances cannot shake recurring deficits due to weak revenue.
Stockton's financial troubles have been compounded, according to city officials, by generous pay and benefits for city employees and retirees and the city taking on too much debt when it enjoyed a home-building boom in the early part of the last decade that transformed it into a distant bedroom community for the San Francisco Bay area.
Many of the houses built and bought in that boom have been abandoned, repossessed and sold at deep discount as Stockton has been at the top or near the top of lists of housing markets suffering a glut of foreclosures in recent years. (Reporting by Jim Christie, editing by Tiziana Barghini and M.D. Golan)