Stockton, CA is facing a desperate situation. Either they hit a home run in civil mediation with bond-market players, or they face having the reputation of being the largest city to declare bankruptcy. Of course, the proceedings are tightly sealed, but there is much information going into the mediation services that can reveal some of what will be going on in these closed sessions.

Stockton's Mountain of Debt Leading to Mediation Services

Stockton has already defaulted on 3 bonds, and Wells Fargo has foreclosed on the city's garages and city hall. By entering into mediation, they have added a third point of concern for investors in other cities in the area. Added to a fourth multimillion dollar annual deficit—this time at $26 million, mediation is all that stands between the city and bankruptcy.

Stockton hopes to get at least some of their financial obligations a “haircut,” meaning a reduction in overall debt or interest. The debt to bondholders has ballooned to $13 million—600% increase over the past four years. The retiree healthcare plan is $9 million annually, and has been compared to a Ponzi scheme. Stockton may lose as much as $12 million in back pay and benefits in Superior Court.

Investors taking Hard-Line in the Mediation

Generosity is not usually considered a keyword for debtors, and this mediation seems to be no exception. Currently, the question that is being asked is, “What have you already done to fix this situation?” An army of lawyers and accountants are going over Stockton's books to evaluate their efforts. Once everyone can agree on what exactly the situation is, then the “haircut” negotiations can begin.

So far, both parties have agreed on who will be mediating this dispute. Ralph Mabey, retired bankruptcy judge, will be the moderator of these discussions.