Stockton's bankruptcy shows why an L.A. filing is next to impossible

It's been almost a year since city officials filed for protection, and creditors are still griping about whether the city is actually insolvent. On Monday, a U.S. bankruptcy judge said that Stockton officials have been negotiating in good faith and that their major creditors aren't. As a result, the bankruptcy proceedings can continue, which means that the city will have more of a say on which bills to pay. Yet today's ruling is only an incremental step in a process that will take years to play out, leaving Stockton with little financial footing and no way of planning for the long term. Can you imagine a developer looking to cut a deal? Would a business want to make a major capital investment? This is why a Chapter 9 filing is so problematic for cities, and why there's virtually no chance of it happening in the city of L.A. But if bankruptcy is not the way to deal with structural deficits, what is? Voter initiatives like the ones in San Jose and San Diego are a possibility, although keep in mind that both measures are being fought in the courts. Simply put, there's no easy solution. From Bloomberg:

Without bankruptcy court protection, Stockton's creditors would be free to sue the city in state court, where it's easier to force asset sales, cuts in city services or a boost in revenue to pay debt. While in bankruptcy, Stockton is shielded from such tactics and has more power to choose which bills to pay. Before filing for bankruptcy in June under Chapter 9 of the U.S. Bankruptcy Code, the city asked bondholders and other lenders owed more than $300 million to take less than full repayment. The city listed assets of more than $1 billion and debt of more than $500 million in its bankruptcy petition.

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Creditors claimed that the city failed to meet at least one of three primary tests specified in Chapter 9 or California law. Before turning to bankruptcy, a city must be insolvent, have permission from its state government, and have tried in "good faith" to negotiate a deal with creditors. Assured, based in Hamilton, Bermuda, argued in court papers that the city, in an effort to become insolvent, manipulated its budget process by refusing to raise taxes and limiting service cuts. The insurer would be on the hook for tens of millions of dollars in bond payments if the city wins permission to eliminate the debt.