U.S. bankruptcy ruling possible for Stockton, Calif.

By Don Thompson, Associated Press

Wednesday, Oct. 1, 2014 | 10:20 a.m.

SACRAMENTO, Calif. — A federal judge could rule Wednesday on a bankruptcy exit plan for Stockton, an inland port city in California that in 2012 became the largest city in the U.S. to file for Chapter 9 protection before Detroit filed last year.

U.S. Bankruptcy Judge Christopher Klein has scheduled a hearing in Sacramento in a trial that has lasted more than four months.

"We're looking forward to exiting bankruptcy and implementing our plan," said Connie Cochran, a Stockton spokeswoman. She said the city feels confident about its proposal and said it's one that Stockton can afford and implement.

Before the recession, leaders spent millions of dollars revitalizing the downtown area by buying a new City Hall and building a marina, a sports arena and a ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.

Mounting pension costs also played a significant role in Stockton and later San Bernardino and Vallejo filing for bankruptcy protection in the state.

With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn't pay its bills. The city slashed millions of dollars from its budget and laid off 25 percent of its police officers. Crime soared.

The city about 80 miles east of San Francisco is asking Judge Klein to approve its plan for reorganizing more than $900 million in long-term debt, while Franklin Templeton Investments wants the judge to reject it.

The city has reached deals with all of its major creditors, except for Franklin, which took Stockton to trial.

The investment firm's attorney, James Johnston, said during opening statements in May that it is being offered 1 cent on each dollar for a $35 million loan given to Stockton in 2009 to build firehouses and parks, and to move its police dispatch center.

Johnston told the judge that Stockton struck much more favorable deals with other creditors. The attorney said the city is making a meager comeback, allowing it to pay its debts to the firm.

Vallejo went through bankruptcy before Stockton, and San Bernardino filed shortly after Stockton, but it has yet to present an exit plan.

Stockton's leaders say the city fell victim to an unforgiving boom-and-bust economic cycle.

Stockton was once an official "All-America City" before hard times hit with the collapse of the housing market. In the years that followed, Stockton twice led Forbes magazine's list of "America's most miserable cities."

At one point the police union was so upset over layoffs and a record homicide rate that it posted billboards tracking the city's body count and disclosing the city manager's phone number. One blood-spattered sign read: "Welcome to the 2nd most dangerous city in California: Stop laying off cops!"

The city is a gateway to Yosemite National Park and one of just two deep-water inland ports in California.