City of Stockton Considering Bankruptcy Filing
The news that the City of Stockton is considering a bankruptcy filing should not really be an eye opener. Why not? It has to do with the feedback process of a recession.
The City of Stockton is located in California. It has been a post child for the housing crash. Featured on 60 Minutes and other shows, the city has seen a massive number of home failures. In 2008, 10 percent of all homes in Stockton went into foreclosure. It is truly a mess.
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So, what happens when foreclosures flood the market like we are seeing in Stockton? The first problem is you have a lot of empty properties. With the owners walking away, there is nobody to pay property taxes. Property taxes make up a large percentage of the budget for most cities and certainly Stockton.
When things go bad, people also tend to keep their money in their pocket. We are seeing this across the country. The last quarter of 2008 saw the economy contract a staggering 6.2 percent, something that was thought unthinkable only a few years ago. As this occurs in Stockton [and your city], the city loses revenue from the decreased sales tax receipts.
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The financial profile of a city can quickly collapse when these two figures take a beating. In the case of Stockton, the city is running a debt of $30 million. For a city the size of Stockton, that is a lot of money. This is why the city is now considering whether a bankruptcy filing makes sense at this point.
Can we expect to see other municipalities and cities file for bankruptcy in 2009? Absolutely. The massive foreclosures are already having an effect on the bottom line and it is going to get worse for cities as the reduced sales tax revenues from late 2008 and early 2009 start to show up on their books.