Stockton's pain is just beginning. The city's 2011-2012 annual budget proposed a deficit of $161M, with only a $5M reduction from the previous year. It's right there on page 2 so we can't miss it. This meager stab at a return to solvency wasn't going to cut the mustard. The numbers describing the city's inability to meet its obligations were in plain sight for any city government employee to see.
Stockton was a nice little farm town before the housing boom paved over its best acreage with unneeded McMansions. I've driven through it several times. The city has a decent downtown, waterfront, and working port. All it needs to do now is take a page out of Detroit's playbook and launch a de-urbanization program. Use eminent domain to bulldoze the suburbs built since 2003 and return Stockton to a level of physical infrastructure that its tax base can support.
The state government can theoretically bail out a city or county government but the folks in Sacramento are having a tough time balancing the state's budget (again). I allowed the last of my California municipal bonds to mature this month and I won't buy any more. The state can't default on its bonds unless a referendum or the Legislature amends the state Constitution. That's not a good enough reason for me to buy Cal munis with the U.S. dollar facing devaluation from Fed QE and potential abandonment from international bond investors.
Full disclosure: No positions in City of Stockton bonds at this time.