Bankruptcy and misery for the Golden State

Posted in 'Credit Crunch' by Tom Magor

18 July 2012

In a time of global economic recession and financial hardship, it comes as no surprise that bankruptcy has become increasingly common. Despite this, the notion of an entire city declaring itself bankrupt seems almost unthinkable.

Nonetheless, Stockton, California is part of a new trend.

American cities that have been hit with severe financial hardship and declared themselves bankrupt having a severe impact on the daily lives of local residents. The financial issues facing the city have led to a large reduction in the local police force despite surging crime rates. This encapsulates the situation of Stockton. While you can't get away with murder, it sometimes seems that you can get away with everything else.

The situation hasn't always been so gloomy in Stockton. Despite previous ups and downs the former river port flourished during the 19th Century gold rush. In contrast, the outlook in the 21st century seems grim for 'America's most miserable city'.

Stockton has an unemployment rate of twice the national average and is characterised by one of the highest murder rates in the country.

Even though crime levels are at record levels, the city can't afford to prosecute offenders and many of those arrested get released early.

Resources are so scarce police cannot afford to even investigate the usual matters that are reported to them by residents.

Furthermore, projects which previously represented hope and prosperity have transformed into pointless burdens. Those who wish to seek refuge in Stockton’s City Hall may be left wanting. It is now closed one day a week to cut costs.

Stockton’s problems stem from its heavy reliance on property tax. As property prices plummeted, the local government's income was slashed and the city could not cut costs fast enough to pay creditors as they fell due.

Bankruptcy is a device which allows Stockton to avoid paying creditors – often local businesses who will now suffer huge losses - preventing even deeper cuts.

Perhaps most concerning of all, the case of Stockton is not an isolated example. Mammoth Lakes, California has also filed for bankruptcy. When you consider the state of the wider world economy and the fact that America itself is deep in the red, the future looks very uncertain indeed

Tom Magor is a Credit Analyst at Checkmyfile. He has a degree in Business Administration from the University of Plymouth. He can be contacted at tom.magor@checkmyfile.com.