California's new mediation law (aka Assembly Bill 506). The law, passed in early 2012, states that cities and other municipalities wishing to file bankruptcy, must first engage in mediation with their creditors. The period can last for up to three months.

Why is Stockton, CA in Civil Mediation With Creditors?

A California state law mandates that cities adopt balanced budgets before July 1 of each year. If Stockton fails to do so this year, the city could go into Chapter 9 bankruptcy. The city is currently in mediation with its creditors to see if it can meet its financial obligations to them, without filing bankruptcy.

Stockton has been one of the hardest-hit cities of the recession. It suffered from its own real-estate boom and lost income taxes, as well as hefty city investments (a hotel, a sports arena, and a promenade) that failed to generate revenue as expected.

What Does Chapter Nine Bankruptcy Entail?

Chapter 9 won't relieve Stockton of its debts, but rather provide a "pause button," a time during which the city doesn't have to pay creditors. This "grace period" will help the city recuperate.

During the time of Chapter 9, the city will be able to avoid numerous lawsuits that might otherwise come about. The bankruptcy will not be permanent, however. Once it is over with, the city will have pay the companies with which it is now in mediation.

What if Mediation Fails?

The Stockton City Council is expected to come out of mediation soon (the California law provides for no more than three months). If it has not reached an agreement with its creditors, it may have to adopt a special budget, and go into bankruptcy.

Under this plan, debt and legal payments would be put off for the duration of the bankruptcy; pay and benefits for city employees would be lowered; and health benefits for former city employee retirees would be reduced. The city would also step up its efforts with parking citations and code enforcement in an effort to generate new revenue.

Once the city exits mediation, it could take action on Chapter 9 as early as June 28.