The city of Stockton, California, in an attempt to find an alternative to bankruptcy, officially entered into debt mediation to reach a resolution regarding its significant deficit and problems with paying out employee retirement benefits.  As one of the hardest hit areas of the 2008 housing market crash, the city has been struggling to maintain its financial obligations without filing Chapter 9 Bankruptcy, and used debt mediation as a way to work with all involved parties to attempt to reach a resolution that would be satisfactory to everyone involved.

The debt mediation process included extensive negotiations between the city, its unions, its retirees and the creditors to whom it owes money.  Since the city made the choice to enter into debt mediation, these negotiations were kept private and there were no public audiences, thus eliminating the need for negotiators to maintain sides for the sake of status quo or political party favor.  This confidentiality is one of the major benefits of debt mediation and helps large entities or small businesses avoid the public exposure of their very private fiscal matters. 

The City Council agreed to enter into debt mediation and put aside $3.5 million to cover the expense of the mediation process.  In doing so, Stockton has become the first California municipality to abide by a recent California law that requires all California cities to participate in debt mediation before filing for bankruptcy protection through the courts. 

Although debt mediation helped clear up the issue for all sides involved, the city eventually had to file Chapter 9 bankruptcy after the debt mediation proceedings ended without the parties reaching a satisfactory resolution.  With two consecutive years of deficits in the tens of millions of dollars, and extreme budget cuts like getting rid of almost a quarter of its police force, Stockton doesn’t have a lot of options left to take.  The primary issue surrounded the retirement benefits provided to city employees—the city claims such benefits are costing too much money for it to stay out of the red and meet its annual budget. 

Although debt mediation didn’t work in this particular case, it is clear from the California legislative ruling that debt mediation is an important step for cities to take before making the final decision to file for bankruptcy.