Stockton Bankruptcy Case Paves Way For Pension Fight

The city of Stockton, California is eligible for bankruptcy, according to a court ruling issued Monday. The decision is expected to result in significant conflict involving the financially-strapped city’s pension fund.

Stockton’s most substantial debt comes in the form of roughly $900 million owed to the California Public Employees Retirement System. The city has fought against reducing payments to the fund as part of its debt restructuring plan, much to the chagrin of its creditors.

In 2007, the city reportedly turned to some of its largest creditors as the debt climbed, who responded by insuring approximately $165 million in bonds to help Stockton keep up with pension payments.

Now, attorneys for the creditors reportedly contend that their clients should not forced to accept reduced payments because the city refuses to recoup losses by lowering pension amounts.

However, Monday’s ruling did not impose demands on Stockton regarding the pension matter, but indicated that the issue will most likely remain a factor in the city’s financial recuperation.

“I don’t know whether spiked pensions can be reeled back in,” stated US Bankruptcy Judge Christopher Klein during the proceeding.

Klein continued:

“This does not mean there is not potentially a serious issue involving [the fund]. But at this point I do not know what that is. There are very complex and difficult questions of law that I can see out there on the horizon.”

While Stockton has continually opted not to employ changes to the pension fund, the city did recently take measures to reduce costs in other areas. Several programs have taken hits during the city’s attempt to climb out of debt.

Last year the city reportedly lowered employee healthcare benefits, ceased bond payments, and made budget cuts that resulted in a 25 percent reduction of its police force. The hit to law enforcement was a particularly hard blow to the city, which is considered California’s second-most-violent.

According to Judge Klein, Stockton’s decision to file for Chapter 9 bankruptcy was a viable one:

“It’s apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law.”

The ruling could have far-reaching implications for other cities struggling with budget shortfalls. Municipal bond market investors fear that the Stockton bankruptcy could pave the way for similar cases, allowing numerous cities to stop creditor payments without making cuts to pension plans.

Robert G. Flanders Jr, a state receiver who was appointed to oversee similar issues facing a debt-ridden city in Rhode Island, spoke about the Stockton bankruptcy case following Monday’s ruling:

“Naturally, the bondholders and others who will be taking a big haircut in the debt adjustment process are saying that’s not fair — there’s a big class of creditors who are being given a free pass here. The issue is a very important one, not just in Stockton and not just in California, but across the country.”

What do you think of the Stockton, California bankruptcy case? Do you agree with the judge’s decision not to force the city to cut pension payments?

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