CNN CNN


 

Return to Transcripts main page

INSIDE MAN

Bankruptcy

Aired August 11, 2013 - 22:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


MORGAN SPURLOCK, CNN HOST (voice-over): It seemed like we were all on the road to riches. It almost seemed too good to be true. Well, guess what? It was.

When the bottom fell out of the real estate market, millions of Americans fell on hard times. Some lost everything. And in one way or another, most of us are still recovering. The thing is, it's not just people and businesses who have suffered.

JEN ROGERS, REUTERS: Jefferson County, Alabama filed for the largest municipal bankruptcy.

ERIN BURNETT, CNN HOST, OUTFRONT: The city of opportunity finding itself in bankruptcy.

SPURLOCK: All over the country, entire cities are going broke, and nowhere is it more apparent than in Stockton, California, which as of 2012 is the largest city to declare bankruptcy in U.S. history.

Hi, how you?

UNIDENTIFIED FEMALE: Hi, how you? Welcome.

SPURLOCK: Thank you.

UNIDENTIFIED FEMALE: Checking in?

SPURLOCK: Checking in. Spurlock.

UNIDENTIFIED FEMALE: Is this your first time to Stockton?

SPURLOCK: It's my first time.

UNIDENTIFIED FEMALE: Very good.

SPURLOCK: Nice! Wow. Wow. This is a -- this is like a really -- this is a really nice hotel room. This is like a really nice view. Look at this. This is the arena, the waterfront, Waterfront Park. I mean you look at this and you wouldn't think anything is wrong. Look how nice this is. This is like so pretty. It's beautiful. Look, there is ducks. Anywhere there is ducks, good things are happening. I mean, it's hard to believe this is the largest bankrupt city in America.

It's like a really nice, empty hotel. I really think I might be the only person staying here. For a city that just declared bankruptcy, Stockton doesn't look all that bad. But looks can be deceiving. The whole country suffered when the economy tanked in 2008. But five years later, when other towns are finally digging themselves out, Stockton is in deeper than ever, with record crime and one of the highest unemployment rates in the nation. And it's not just my hotel that is empty. Last year Stockton had the highest foreclosure rates for a metropolitan area in the entire nation. Still, it hasn't been all bad. I mean they did win an award.

UNIDENTIFIED FEMALE REPORTER: "Forbes" magazine once again has ranked Stockton as the most miserable city in the United States.

SPURLOCK: So why was Stockton hit so hard? Who is really to blame for the mess they're in? And maybe most important, is there any way out of it?

CROWD: Enough is enough! Enough is enough!

SPURLOCK: To learn a little more, I decided to attend the monthly city council meeting, where ordinary Stocktonians gather to voice their opinions about how the city is doing.

MAYOR ANN JOHNSTON, STOCKTON: Good evening. Welcome to the Stockton city council meeting. We are happy you could join us this evening. At this time, I would like to welcome community leader Dave Cecilio (ph) from reality church to give the invocation tonight. Thank you.

DAVE CECILLIO (ph), COMMUNITY LEADER: Thank you. If you would bow your heads, please. Heavenly father, I just thank you for this privilege, Lord. I pray that you would restore this city, a broken city that needs you, especially in light of the state of our finances. We ask that you would bring about a miracle of God to make this city which has in the past been so prosperous and so prominent in the state once again be a safe and a prosperous place.

UNIDENTIFIED MALE: Sometimes we have to focus on something that inspires us to keep hope alive. The Stockton beautiful rose garden in Victory Park.

UNIDENTIFIED MALE: We're going to continue to zig and zag and come up with different ways to continue to make our great city this all- American city that it has won twice.

SPURLOCK: Considering the circumstances, it seems like some of these Stocktonians are lobbing softballs at the mayor. But not everyone is playing.

UNIDENTIFIED MALE: When things are going bad, you need to make a change. Bankruptcy, high crime, police officer working without a contract, fire department destroyed, and the list goes on and on and on.

UNIDENTIFIED MALE: Today we're the foreclosure capital of America. Today we're the homicide capital.

UNIDENTIFIED FEMALE: The trash. It's dirty.

UNIDENTIFIED MALE: Mayor Ann Johnson, please resign.

UNIDENTIFIED FEMALE: Over 20 years of your crime against humanity.

JOHNSTON: Your time is up. Your time is up, Mrs. Nguyen.

SPURLOCK: Tell me about the boom years of Stockton.

JOHNSTON: In '99, the city was beginning to come out of the recession of the '90s. By 2004, it was a booming economy here because we had thousands of people moving in here from the bay area because they could afford the how many times here. They could buy a great house in a great subdivision. And then commute to work in the bay area. So our population expanded by like 20 percent.

SPURLOCK: Why did Stockton go broke?

JOHNSTON: Why did Stockton go broke? Because when the money was rolling in, tax money is still tax money, property tax money, the decision was made to try to invest the money that was coming in things that would benefit the community.

SPURLOCK: Things that would benefit the community like new schools, better roads, more police, and emergency service worker, right? Not exactly.

This is the marina they built. This marina apparently cost $22 million. And it's basically just a place for you to dock your boats there is no gas. There is no place to get food. There is no place to get snacks. There is no place to dump your waste. So it's a marina that -- that doesn't serve any of the purposes of a marina. It cost $22 million.

This is a pretty awesome baseball stadium. You got to admit. But you know, you have to wonder how much money does a minor league baseball stadium actually generate for a city? For civic pride you could do a lot of other things with $22 million. It's a nice looking arena, and a great place to catch Cirque Du Soleil when they come to town, once a year.

This is the crown jewel of Stockton. In the middle of the boom, the city hall decided what we need is a new city hall for $40 million, and then ended up defaulting on it. And now there is a bank in the bottom. Some people on a couple of the floors. But most of this giant building is empty.

As if that's not bad enough that. They spent $32 million on two other parking garages next door which they also defaulted which also aren't being used.

Throw in a couple of other pet projects, and all told, Stockton racked up a pretty hefty bill. They decided to pay for it the old-fashioned way. They borrowed for it by issuing municipal bonds to cover the costs of the projects. But when the housing bubble burst, the tax revenue they were counting on dried up, and Stockton found itself unable to pay back the loans.

You know, it's interesting, because Stockton was this boomtown, this boomtown that really kind of came into existence during the gold rush. And when you kind of look at the things that were being built, it was almost this same type of gold rush mentality, this dream ideal of what a city would be, of what you wanted this place to become. And right when that dream was about to be realized, everything crashed, everything collapsed.

(COMMERCIAL BREAK)

SPURLOCK: For a decade, Stockton rode the housing boom for all it was worth, building new homes for a growing population hungry for real estate. After the housing market collapsed, thousands of people suddenly found themselves unable to pay their mortgages. With nothing left to loose, many residents just walked away, leaving neighborhoods like this one full of middle class homes that are modern, spacious, and completely abandoned.

RICHARD SMITH, STOCKTON RESIDENT: I believe at one time there was upwards -- I know there was well over 33 percent were vacant. And I think at one point it got closer to 50 percent in this area in western ranch.

SPURLOCK: Richard and his wife Anne have lived in Stockton for more than 12 years. They say all the empty houses have torn the fabric of their community.

Is there a lot of crime in this area now?

RICHARD SMITH: There is now. I mean, it's pretty obvious which homes are lived in and which is not. Say you're a criminal; it's pretty easy to decide which house you want to hide out at. There was a shooting last week.

ANNE SMITH, STOCKTON RESIDENT: Last Thursday. Six rounds. And then three hours later, we get another one, and it is like a couple more blocks down.

SPURLOCK: You're like wow, that's the neighborhood we live in now.

ANNE SMITH: Yes. I don't want to be in that kind of a neighborhood.

RICHARD SMITH: The new one is they knock on your front door. If you open the door, at gunpoint they take your stuff. If you don't open the door, they go around the back and come in the back door.

SPURLOCK: And that's happened in your neighborhood?

RICHARD SMITH: Yes. That's how brazen is it now. Western ranch used to have a substation. We used to have our own police station and have officers around all the time. We don't have police officers out here. So it doesn't take a very advanced criminal to figure out there is nobody here to catch me. I'm pretty open to going out and doing whatever I want, right.

SPURLOCK: Right.

RICHARD SMITH: All I want is a stop in the violence. I mean the violence stops, then, the home values go back up, of course. Then the jobs come back to Stockton. Business comes back to Stockton. All the businesses that left come back. It starts at the very bottom, which is the crime.

SPURLOCK: Yes.

It sounds like a simple idea. Stop the crime. Watch the city spring back to life. Only in Stockton it's not that easy. Deep budget cuts have made even the most basic municipal tasks like John Prutch's job code enforcement incredibly difficult.

JOHN PRUTCH, CODE ENFORCEMENT OFFICER: Hey, Lynn, is this dispatch? Hey, this is John over in code enforcement. I was wondering if I could get a police officer to meet me at a vacant house.

SPURLOCK: Who are you calling right then?

PRUTCH: Police dispatch.

SPURLOCK: OK.

PRUTCH: My contact, who was supposed to be tagging along, he was just kind of driving around in the part of town we were going to go to, and then they just found three burglary suspects. It happens every time.

SPURLOCK: Wow.

PRUTCH: Yes, yes.

SPURLOCK: Just another day in Stockton?

PRUTCH: That's it.

SPURLOCK: John's job boils down to stopping crimes before they start, boarding up vacant homes, and protecting neighborhoods against urban blight. But in a town with thousands of vacant housing units and only 12 enforcement officers, it's fair to say that the good guys are a little outnumbered.

PRUTCH: It looks like the posting is on the window. That's a requirement. We don't really care for them too much. When you see stuff like this, all the transients and teenaged kids in the neighborhood know it's a vacant house.

SPURLOCK: Right.

PRUTCH: When we see these blankets and sheets up, it's a pretty good sign that someone is living in there. I would bet on it.

SPURLOCK: Yes. So a lot of times the neighbors actually call in?

PRUTCH: Absolutely.

SPURLOCK: And notify you.

PRUTCH: Right. The complaint said there is transients living inside.

SPURLOCK: OK.

PRUTCH: And a lot of the property owners, they know best. They know who is supposed to be here. They know the house is supposed to be vacant.

SPURLOCK: Not our guy?

PRUTCH: No, it's him.

UNIDENTIFIED MALE: A k-9 unit. Come out with your hands up. Come out with your hands up.

SPURLOCK: It smells terrible in here.

UNIDENTIFIED MALE: Places are real easy to get into, and they just squat here and do their drugs, and they'll sit here until they get caught. And then they'll just go to the next one.

SPURLOCK: So have you seen places that you have boarded up before that you have had to gone back, gone back like second time?

UNIDENTIFIED MALE: I've gone back to the same house ten times.

SPURLOCK: Wow.

UNIDENTIFIED MALE: What will stop you.

SPURLOCK: Yes. This one is still boarded up. That's a good sign.

PRUTCH: This one is still boarded up. But for whatever reason, they're getting inside. Squatters have gotten in this garage twice now. Hey, how is it going?

UNIDENTIFIED MALE: All right.

SPURLOCK: What is up? This is where you're hanging out now?

PRUTCH: Yes.

SPURLOCK: How long have you been staying in here?

PRUTCH: I've been here for two weeks.

SPURLOCK: Is there nowhere else to go? Is there no shelter or anything here?

PRUTCH: You should see the shelters.

SPURLOCK: Yes. Packed. Sidewalks outside with tents and cardboard boxes.

PRUTCH: Hello, city of Stockton. Anyone in here? SPURLOCK: It's like they were cooking.

PRUTCH: Yes.

SPURLOCK: What is that, heroin?

PRUTCH: Yes.

SPURLOCK: A little crack pipe.

PRUTCH: Right.

Oh, boy. And you can see the garage is open.

SPURLOCK: I know. There is all kinds of stuff back there and the garage is open.

PRUTCH: Son of a gun. Are they getting in the garage?

UNIDENTIFIED MALE: Yes.

PRUTCH: Oh, boy.

So they're climbing over the fence every day?

In this case we're going to have to have our contractor come out, unscrew the board they put in so they can get in there and then screw the garage back up. All right, work with us. We're trying.

UNIDENTIFIED MALE: Thanks, man.

SPURLOCK: This doesn't stop.

PRUTCH: No, not at all.

(COMMERCIAL BREAK)

SPURLOCK: Stockton is not the first city to face financial doom. All across the country, cities, counties, and even states have had to come up with some pretty desperate measures to avoid or try to avoid sliding into bankruptcy. In Utah, a state senator suggested abolishing the 12th grade the save a little cash.

Texas Governor Rick Perry proposed a brands new tax on strip clubs to balance the lone star state's state budget. And the city of Pontiac, Michigan, sold the Silverdome, former home of the Detroit lions. Completed in 1975 at a cost of $55.7 million, roughly $238 million today, Pontiac sold it in 2009 for $583,000. About one percent of what it cost to build. They netted just about enough cash from the deal to buy a nice three bedroom in Phoenix.

There is Harrisburg, Pennsylvania. They racked up a $310 million debt by failing to fix a broken trash incinerator. So Steven Reed, the mayor at the time, did what any responsible mayor would do. He used the money that could have gone to fix the incinerator to travel the country and collect $8 million worth of artifacts for a proposed Wild West museum located in Harrisburg, Pennsylvania.

Stockton didn't go the Wild West route. They did something even more desperate. Faced with huge deficits, they made drastic cuts to municipal services, including the department of public works, the fire department, and a full 25 percent of their police force.

And there have been a lot of people who said part of the reason this problem came about, or one of the big reasons was the influence of the police and fire unions.

JOHNSTON: Yes. I mean, two years ago, I looked at salary statistics. There were over 200 employees in the city out of 1700 that made over $200,000 a year. The majority of those, all but about 15 were in the fire department and the police department. That was an eye-opener to me, because you expect some of the key management people to, you know, have the higher salaries. I mean, our city manager makes a little over 200,000. His deputy makes 190, something like that, the highest paid. They do the work.

SPURLOCK: Right.

JOHNSTON: But for, you know, the policemen, the firefighter to make almost $200,000 or over $200,000, it's like whoa.

SPURLOCK: Stockton saw the results of the cuts they made almost immediately. Just not the results they wanted.

UNIDENTIFIED MALE: Shooting, the 299th shooting of the year. Male victim, Steven. He was shot in the back, transported to county hospital. Carjacking, kidnapping, south, 1120 east main street, 19- year-old male victim.

SPURLOCK: Violent crimes spiked, making Stockton one of the ten most dangerous cities in America.

BLAIR BECKER, TELECOMMUNICATOR, 911 CALL CENTER: Stockton 911, what is yourself emergency?

SPURLOCK: In 2011, they had 58 homicides, a record-breaking number that strained the response team even further.

BECKER: She is in shock.

SPURLOCK: Walk me through what happens.

BECKER: OK. These are all the calls that are holding that have yet to have been sent an officer. And then this right here is going to be all the officers that are currently on calls. And these are the calls and the addresses that they're sent to. So we just had a homicide. So that's what they're going to be working right now.

UNIDENTIFIED MALE: Male is dead and the female is still breathing. Right now we're calling these. I don't know who we're going to send.

SPURLOCK: You have information on that homicide, like what happened? BECKER: I got a report of a neighbor that said that they heard some shots fired in the area. And when they went to go check on their neighbor, they found her down. We just had a double homicide last night too.

SPURLOCK: There were three homicides this weekend, right?

BECKER: Yes.

SPURLOCK: How long have you been here?

BECKER: Five years in December.

SPURLOCK: Five years in December. So you basically started right before the housing collapse.

BECKER: Yes.

SPURLOCK: How was it then until now?

BECKER: We had more people that were working amongst us.

SPURLOCK: Yes.

BECKER: And more officers on the street. When you don't have as many officers on the street, it makes it difficult when you're doing your dispatching job, because you have nobody to go to the calls. As you can see, we have 43 that are still holding that don't have anybody that has even responded yet. We just don't have anybody to go.

SPURLOCK: That's -- that's disheartening.

BECKER: You try to get them the help as fast as you can, but we can only do so much with what we have.

SPURLOCK: It appears this isn't as related to the 187 on regent, female victim is being transported to AMR to county.

BECKER: Have they found a third victim.

SPURLOCK: Have another body inside the van. Medics are on the scene. Third victim is 972. What is 972?

BECKER: Dead.

SPURLOCK: Is that the most homicides that have ever happened in Stockton?

BECKER: Yes.

SPURLOCK: Ever?

BECKER: Yes.

SPURLOCK: Wow.

BECKER: We broke our record 45 minutes ago.

SPURLOCK: And there are still two and a half months left in the year.

BECKER: Yes.

SPURLOCK: Yes.

UNIDENTIFIED MALE: There is two people shot on Wagner heights. One is a 187. I think the other is still alive.

SPURLOCK: I'm riding to the crime scene with responding officer sergeant Bill Hutto. They tell me there were two bodies there, is that correct?

BILL HUTTO, SERGEANT, STOCKTON POLICE DEPARTMENT: I don't know if there is three or four homicides related to this incident. But we're going to go over to the regent which is where the command post is set up, and we will get briefed there on what is going on.

SPURLOCK: Sergeant Hutto is a 23-year veteran of the Stockton police force. And in more than two decades of service, he has never seen the city as dangerous as it is now.

HUTTO: We went this past I think five or six weeks with only two homicides. Pretty slow for us.

SPURLOCK: Yes.

HUTTO: And everybody is like wow. And maybe things died down. And then you get a weekend like this.

SPURLOCK: Right. Is it six in total now?

HUTTO: There is three today. That makes eight for the weekend, from today's incident. If there is another one, it will make nine.

SPURLOCK: Wow. That's incredible.

HUTTO: Yes.

SPURLOCK: So what do you think is part of the reason why there are more homicides now than there have ever been?

HUTTO: Less staffing all the way around.

SPURLOCK: Yes.

HUTTO: There is less detectives, less officers. Code enforcement has been cut. Our CSOs have been cut.

SPURLOCK: Can you just walk me through what happened here?

HUTTO: I know that a guy, I don't know who, killed a lady here.

SPURLOCK: Yes.

HUTTO: And then went to the other address on Wagner heights and killed one or two more.

SPURLOCK: OK.

HUTTO: And killed himself.

SPURLOCK: At that address?

HUTTO: At that address.

SPURLOCK: OK.

HUTTO: And then when they checked his vehicle that was out front or nearby, they found another person in his vehicle dead.

OK. 957 is shots fired.

UNIDENTIFIED FEMALE: Shirt with jeans -- 957.

HUTTO: You'll hear that. Hey, where are you at? OK. I'm in route.

SPURLOCK: Are they at the other crime scene?

HUTTO: Yes, they're on Wagner heights.

SPURLOCK: OK.

HUTTO: I've worked homicide prior to becoming a public information officer. This is something that I have never seen.

SPURLOCK: Right.

HUTTO: Our homicide unit right now is depleted because of limited resources. And we've had to call in other detectives from other units within the police department just to come out to assist our homicide teams with witness statements and processing the crime scene.

SPURLOCK: Right.

HUTTO: So very taxing right now.

SPURLOCK: Yes.

HUTTO: The bottom line is when you cut 25 percent of the department and 25 percent of the city workforce, and your crime starts going through the roof, there is a direct correlation.

SPURLOCK: Right.

That may be true, but in spite of Stockton's obvious need for more police, many residents have followed the mayor's lead and laid the feet squarely at the feet of firemen, police officers, and their unions.

When you hear people -- people who talk about kind of the situation the city is in right now, when they say things like, well, you know, part of the problem is we had too many of the unions make good deals for the cops, the firemen, you know. That's what depleted so many of our resources.

HUTTO: Well, can I -- we start talking about city management like that, can I do that --

SPURLOCK: Absolutely. We can do that.

HUTTO: Yes, absolutely.

SPURLOCK: Out of uniform, Sergeant Hutto can be more candid about his opinions, both as a private citizen and as the vice president of Stockton's police union.

HUTTO: The real problem with the city's finances lies in right here, downtown redevelopment.

SPURLOCK: According to Hutto, when the city was borrowing and spending to develop the waterfront, they neglected to put money into the employee pension system.

HUTTO: During that same time frame, you know, California public employees retirement system was doing so well that they said Stockton, you don't have to make the payments. You can put that money into an investment account and earn money or whatever. So when the stock crashed and said OK, all that money you owe us, go ahead and pay us now, take it out of your investments. Well, Stockton didn't have investments. They spent it. Our retirements bought this. So, I mean yes, we are to blame because we still want our retirement. But they're the ones that spent our money. They didn't pay their bill for, you know, eight or nine years.

SPURLOCK: Yes. And it's your fault?

HUTTO: Yes.

(COMMERCIAL BREAK)

SPURLOCK: On June 28, 2012, with no other options available to them, the city of Stockton filed for bankruptcy.

UNIDENTIFIED MALE REPORTER: Stockton became the largest city in the country to start bankruptcy proceedings.

UNIDENTIFIED FEMALE REPORTER: The largest American city ever to file for bankruptcy.

SPURLOCK: Municipal bankruptcy, or chapter 9, can be broken down into three parts, the good, the bad, and the ugly.

First, the good. Bankruptcy allows a city to restructure their debt while ensuring the most basic city services can continue. It lets the city renegotiate union contracts, pensions, and benefits, a huge relief to any city struggling under the weight of those obligations and sometimes it works.

Vallejo, California, is a city 90 minutes west of Stockton. They filed for bankruptcy protection in 2008. The restructuring allowed them to ditch at least $32 million in debt and pay some creditors as little as five cents on the dollar. The city also cut benefits for retirees to just $300 per month, down from as much as $1500 in some cases. Finally, Vallejo was able to emerge from bankruptcy just three years later. The bad part of bankruptcy, creditors take note and refuse to do business with cities that don't pay their debt.

As for the ugly part of bankruptcy, that's simple. It's being a retiree or city employee caught on the wrong side of those negotiations, watching your benefits disappear.

Hi there. Hey, I'm Morgan.

VAN RIVIERE, BATTALION CHIEF, STOCKTON FIRE DEPARTMENT: Van Riviere. Nice to meet you.

SPURLOCK: Thank you.

RIVIERE: I have a uniform t-shirt I would like you to put on, is that going to be all right?

SPURLOCK: Right on!

The city of Stockton made $19 million in cuts to the fire department. Staffing was reduced by 30 percent, 36 firefighters were laid off in 2011 alone. Retirement and insurance benefits were slashed, and now these firemen face an uncertain future.

How hard is that? Here you are living on your income, and you know exactly how much you are to spend. And then suddenly that's cut by 25 percent.

UNIDENTIFIED MALE: I worry about whether or not I can afford another baby. And it's not about affording diapers and wipes and shoes and stuff. It's about the bill from the hospital to actually have the baby.

UNIDENTIFIED MALE: We've had some that have had immediate, boom, $10,000 bill out of pocket as a result of, you know, a pregnancy or pregnancy with complications.

UNIDENTIFIED MALE: You know, I lost my home as a part of this mess too. A lot of us were going along thinking things were going to get better. Things aren't going get better.

SPURLOCK: A lot of people have said, including the mayor, that one of the reasons that led to the bankruptcy was the negotiating power of the police and fire unions that kind of brought about exorbitant fees, salaries, pensions.

UNIDENTIFIED MALE: Not to kind of cry, but it's turned its way into political attacks. Well, the mayor says contracts with union PD are a huge reason we're in this position. I mean, that gets spread, and that's kind of where a lot of the community stands. And a lot of it is like real negative.

UNIDENTIFIED MALE: They put this off on the fire engine now driving down the street.

UNIDENTIFIED MALE: Throw stuff. And we get rocks, eggs.

UNIDENTIFIED MALE: Eggs.

UNIDENTIFIED MALE: Firecrackers.

UNIDENTIFIED MALE: Bottles.

UNIDENTIFIED MALE: When I was working, the engine has been hit with that stuff. People yelling, cussing -- I mean, it's a total different game than how it was a few years ago.

SPURLOCK: It's pretty convenient to blame your overpaid firefighters for your problems right up until your house is on fire. Still, riding with these guys, I couldn't help but notice how committed they are to the job. In spite of cuts that make their jobs harder and harder and put their livelihood and retirement in doubt, their number one priority is protecting the people in the city of Stockton even when the city can't protect them.

(COMMERCIAL BREAK)

SPURLOCK: This just kind of sums it all up.

Not all of Stockton's problems stem from bankruptcy. The city is home to more than 70 street gangs, and fewer officers on the street translate into a huge uptake in gang violence.

UNIDENTIFIED FEMALE: This triple homicide brought Stockton's homicide rate to 59 these years.

SPURLOCK: Unable to count on the police force, local business owners like Tony Finnegan are taking matters into their own hands.

I heard you have a very dubious honor.

UNIDENTIFIED MALE: What's that?

TONY FINNEGAN, OWNER, FINNEGAN'S: That you're the only place in Stockton where there has not been a shooting. Knock on wood.

FINNEGAN: Right. That is -- that is my understanding. We have been open for about four years now. And thank God that, you know, it hasn't happened. If you noticed, one side of our building that faces the street has no windows. No windows means no bullets. We have concrete block reinforced with, you know, another barrier out front that covers our patio.

SPURLOCK: And building a bulletproof safe house isn't the only thing Tony Finnegan does to protect his valuable customers. Oh, what have you got? This is the whole --

UNIDENTIFIED MALE: It's part of our dress code.

FINNEGAN: So we started off with really simple things. We have a length requirement on t-shirts. So your t-shirt can be up to your outstretched thumb. We don't allow people to wear gold teeth. We don't allow them to wear big medallions. We specified which sports team hats we wouldn't allow in. Certain halts represent certain gangs in Stockton. And we did colors. Somebody comes in all red or all blue or a certain color, we know they're affiliated with a gang.

SPURLOCK: What about green? Green is all right?

FINNEGAN: Green is the only color we allow someone to come head to toe.

LISA GONZALES, KCRA.COM: Setting an example in Stockton, that's what police say one neighborhood watch group is doing.

CHRIS RIVA, KCRA.COM: Taking matters now into their own hands. That's what neighborhood groups in Stockton did today.

SPURLOCK: With violent crime up and fewer officers around to prevent it, Stocktonians have been quietly organizing into community watch groups, determined to fix the problems themselves.

Marci Waller is a founding member of a local neighborhood watch group in the area where Stockton's murder record was recently broken.

MARCI WALLER, NEIGHBORHOOD WATCH CAPTAIN: The best thing now is to continue to encourage Stocktonians to neighbor up and join or start a neighborhood watch. Be aware and take action when something suspicious is happening in your neighborhood. Talk to each other. Come out of your house. Don't isolate yourself out of fear. Walk your streets, walk your dog. Be proactive so you don't have to be reactive.

SPURLOCK: Scott Smith is a reporter for Stockton's local newspaper, "the Record." Are things changing for the better in Stockton?

SCOTT SMITH, REPORTER, THE RECORD: You know what is interesting is I've been covering the bankruptcy big-time. So, I went over to Vallejo which is a short distance from here. And they were sort of the other big city in the state that went into bankruptcy. I went over there for a day and did some reporting. And people I talked to said you know what happened is we became less reliant on the city and police, and we did what they're doing here today. They formed neighborhood watch groups. And that's changed how we live. It forced us to go back 40 years and know our neighbors more so.

And I kind of see that same thing happening here, which is interesting. Everywhere I go, somebody is forming some kind of a group. You know, that doesn't necessarily solve the problem, but it shows you that people are trying to do something. And they're getting engaged with one another, their neighbors, with people in their church, and they're saying OK, how can we use our organization, our neighborhood to do something good?

SPURLOCK: For some, community watch groups conjure up images of nosy neighbors peers out the window. Some Stocktonians are in the market for something a little more adventurous. Hey, man.

UNIDENTIFIED MALE: Come on in.

SPURLOCK: How you?

UNIDENTIFIED MALE: Good to see you.

SPURLOCK: How are you doing? Hey, guys.

UNIDENTIFIED MALE: Everybody, this is Morgan.

SPURLOCK: Hey, I'm Morgan. Brother, good to see you. How you doing?

UNIDENTIFIED MALE: Pretty good.

SPURLOCK: Morgan. So what is the plan for tonight?

UNIDENTIFIED MALE: We're going to do some quick training, and then we're going to go over the patrol area and then do a quick safety brief and make sure there are no questions and move out.

SPURLOCK: How dangerous is the area you're move in?

UNIDENTIFIED MALE: The area we've picked for tonight is moderate. There has been an assault there is an unsolved murder, and about two months ago it was the site of the place a gentleman fled from police, shot at them, barricaded himself and shot himself in the garage.

SPURLOCK: Serious. A serious area.

UNIDENTIFIED MALE: Yes. We're trying to hit the trouble spots in Stockton right now, try and help.

SPURLOCK: Why did you want to do it?

UNIDENTIFIED MALE: Murder number 48 was actually I knew the guy. He was a friend of my dad who he used to work for 15 years. He actually got killed and shot and killed in Victory Park for his gold chain, broad daylight.

SPURLOCK: So that is when you said I got to do something?

UNIDENTIFIED MALE: That was the point where a day later I happened to see the news report about the guardian angels, and hopped on my computer, found the contact info and said how do I do this? Where do I start?

SPURLOCK: That's great. How does that look? Does it look intimidating?

UNIDENTIFIED MALE: Pull it down a little bit. Pull it down to where it's comfortable. How is that? There you go. Now you're one of us. There you go. Nice.

SPURLOCK: So now what are we doing? UNIDENTIFIED MALE: First we're going to go over -- we're going to go over eastbound basic patrol routine.

SPURLOCK: OK.

UNIDENTIFIED MALE: We're going to use you as our bad guy.

SPURLOCK: Awesome.

UNIDENTIFIED MALE: Go ahead and stand right here.

SPURLOCK: OK.

UNIDENTIFIED MALE: Facing me.

SPURLOCK: OK. How is that? Do I look more intimidating now?

UNIDENTIFIED MALE: That's pretty good. I was almost scared. Basically coming across patrol, say we see you out there. You're out there smoking and joking. You're puffing on something that doesn't look like a regular cigarette. We'll approach you. Excuse me, sir, how you doing? What have you got there?

SPURLOCK: Nothing.

UNIDENTIFIED MALE: It doesn't smell like a regular cigarette, you know.

SPURLOCK: Why don't you mind your own business?

UNIDENTIFIED MALE: Well, you know, I wish we could, but, again, we're here for the safety and security of Stockton and its residents.

SPURLOCK: Why don't you guys go somewhere else?

UNIDENTIFIED MALE: Is there anything I can do to gain your compliance.

SPURLOCK: Listen, I live here. This is my house. Hey, this is my house! This is my house! I'm calling the police! I know my rights. I know my rights! This is one of my prouder moments right here. Probably my proudest moment.

UNIDENTIFIED MALE: There you go. Stand up.

UNIDENTIFIED FEMALE: Oh, my God.

SPURLOCK: Well done. Everybody ready?

UNIDENTIFIED MALE: Hands in. On three. Guardian angels on three. Who are we? One, two, three, guardian angels! Move it.

UNIDENTIFIED MALE: It's after 9:00 already at night. So we'll just take up along here real quick where we'll make a pass through the park on the way back around. SPURLOCK: These guys are the eyes and ears of Stockton's reduced police force, and they coordinate with the police before every one of their patrols.

Some people hanging out outside over there. How you doing? We're the guardian angels. Have you guys heard of us?

You have. How you doing?

SPURLOCK: It's not an easy job, but these people love their city too much to see it hurt like this. And they'll do whatever they can to make these neighborhoods safe again.

UNIDENTIFIED MALE: Next year I want to get all these groups together in one spot, right, and have the largest nonprofit event Stockton has seen, and try to bring all our resources together so we can start working as one instead of separate entities.

SPURLOCK: Right. That's a good idea. You could have volunteer Stockton.

UNIDENTIFIED MALE: Exactly.

SPURLOCK: Just the people I spoke to, there is a lot of people who are really invested in wanting to change the community, but they just don't know how.

UNIDENTIFIED MALE: Exactly. I didn't know how either.

SPURLOCK: All over Stockton, people are coming to the same conclusion that even though they didn't cause the problems that plague their city, they can do something to become a part of the solution.

(COMMERCIAL BREAK)

SPURLOCK: It's easy to look at Stockton and see the events that led them to bankruptcy happen somewhere else and not where we live, but in reality cities all over the country are facing these problems. And while the decisions made in city hall sometimes seem abstract, the impact on people's lives is very real.

Hey, how are you?

UNIDENTIFIED FEMALE: Good. Yourself.

SPURLOCK: Checking out.

UNIDENTIFIED FEMALE: Your room number?

SPURLOCK: 358. Spurlock.

UNIDENTIFIED FEMALE: Did you enjoy your stay in Stockton?

SPURLOCK: I did, very much.

A lot of things have changed for Stockton since they filed for bankruptcy.

TED TORRES, KCRA.COM: The city of Stockton swears in a new mayor later today.

DEIRDRE FITZPATRICK, KCRA.COM: Some residents are already expressing some hope that a change in leadership will mean a less violent and more financially sound future for their city.

MAYOR ANTHONY SILVA, STOCKTON: I Anthony Silva.

UNIDENTIFIED MALE: Do solemnly swear.

SILVA: Do solemnly swear.

UNIDENTIFIED MALE: That I will support and defend.

SILVA: That I will support and defend.

UNIDENTIFIED MALE: The constitution of the United States.

SILVA: The constitution of the United States.

UNIDENTIFIED MALE: And the constitution of the state of California.

SILVA: And the constitution of the state of California.

SPURLOCK: Marianne Johnston lost her bid for reelection to Anthony Silva and went back to running the Balloonery, her family's balloon shop. Richard Smith is hoping that mayor Silva can turn things around. If not, he and his neighbors from western ranch are drawing up plans to succeed from Stockton and become their own city.

UNIDENTIFIED MALE: Three occupants of Mustang flee on foot and then the block is 1600 west (INAUDIBLE).

SPURLOCK: Staffing is still a problem for police, who have hired just six officers so far in 2013. But things are looking up. After a record-breaking 71 murders in 2012, this year the homicide rate so far is down. And officers like Sergeant Hutto credits citizens like the neighborhood watch groups and the Guardian Angels with the turnaround.

Speaking of the Guardian Angels, they are still going strong, fixing up area playgrounds and joining forces with Tony Finnegan, helping him to drive customers home from his bar. Tony has had to add two more hats to his banned list, but he has managed to keep his bar free from violence.

On April 1st, 2013, a judge in federal court declared Stockton officially bankrupt. The city is now starting the long process of restructuring its finances and paying its creditors. Stockton's bankruptcy is historic. And how it works its way out will set the precedent for struggling cities across the country.

One thing that I think is really hopeful that has come out of this is that there seems to be a real willingness of the people to work together to try to fix things. And maybe that's what happened when you hit rock bottom. When you finally hit the bottom, you say wow. When there is no money left, what do you have? The only thing that is left over is each other. People are realizing we have to rely on one another to make the city better. It's not going to be just fixed by money. It's going to be fixed by us. And I think that's a good message for everyone.