In what could be a landmark case, a federal bankruptcy court in California has ruled that the City of Stockton should be allowed to move forward with its Chapter 9 proceeding over the objections of the bond holders. The court didn’t opine on the really critical issue of whether federal bankruptcy law trumps state law — there is little if any legal precedent in this area, since municipal bankruptcies are rare. At 300,000 citizens, Stockton is now the largest municipal bankruptcy case.
Even after slashing wages, benefits, library and recreation funding, as well as jobs — including in the police department, resulting in one of the highest crime rates in the nation — Stockton couldn’t afford to repay the $165 million bond it took out in 2007 to help pay its $900 million obligation to CalPERS. After the city’s request for relief was denied by CalPERS, which seems to be drawing a hard line, Stockton filed for bankruptcy relief.
Underfunded state and municipal pensions will continue to be a major issue going forward, due in part to mismanagement by state and local officials who perhaps were not fully prepared or didn’t hire the right advisors. The Stockton case will answer the question of whether pensioners will share in the pain.
