Stockton, CA becomes most populous U.S. city to file for bankruptcy, setting up pension fight

posted at 9:21 pm on April 1, 2013 by Mary Katharine Ham

So, here’s the deal. Stockton, CA ain’t got no money, and has filed for bankruptcy, like San Bernardino before it. Stockton has 300,000 residents and was recently named one of America’s most dangerous cities because it turns out that being mismanaged into blowing all its money and more on promises it can’t keep isn’t all that great for the one thing the city’s supposed to be doing—protecting its citizens.

As with all the rest of California, Stockton is in debt to the California retirement system fund (CalPERS), and has been for some time.

Stockton owes CalPERS as much as $900 million to cover its pension obligation, which is the city’s single-biggest liability. Stockton officials argued before Klein that, due to protections for pensions in the state constitution, it has to pay CalPERS the full amount.

That’s been the typical reasoning in such cases. Promised pension benefits are protected under both state and federal law.

During pre-bankruptcy mediation, Stockton’s creditors understandably bristled at the notion that they might get back 17 cents on the dollar while CalPERS got everything it was owed. Those creditors, after all, put up $165 million for Stockton to pay to CalPERS several years ago.

“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,” says Flanders, a former associate justice of the Rhode Island Supreme Court.

“The issue is a very important one, not just in Stockton and not just in California, but across the country,” he says.

And, here’s where we run into an issue that will reverberate around the country. What wins out? Federal bankruptcy law, which ostensibly allows for the tearing up of contracts (even pension promises) or state and local laws, which protect pension promises? Get ready to hear a bunch of liberals read the 10th Amendment for the first time ever. It’s pensions that are sinking states and cities. A bunch of politicians took public employee union dues, funded their campaigns by promising new and better things to public employee unions, won those campaigns, and knew damn well there was no way to actually deliver on ever more extravagant promises, but went ahead and did it because it’d likely be someone else’s problem some day. ABC reports:

Attorneys for creditors argued that it was unfair for their clients to accept reduced payments while the pensions negotiated in flush times went untouched. They argued that employees who shared the wealth during good times should bow have to endure some of the pain with cuts to their pensions.

Legal observers expect the creditors to aggressively challenge the repayment plan presented by Stockton in the next phase of the process.

“That’s where it will be precedent-setting,” said Karol Denniston, a municipal restructuring expert who monitored the trial. “Does bankruptcy code apply to CalPERS or not? If bankruptcy code trumps state law, then that’s huge and it has huge implications in terms of what happens next for other municipalities across California.”

The state pension plan manages $255 billion in assets but was underfunded by $87 billion in 2011, the last time calculations were made.

I don’t pretend to understand what the correct answer is for Stockton and for the rest of the country. I sympathize with those promised certain benefits who may lose them, even if they are above and beyond what most of us will see. But elected officials have to learn they can’t always make promises they know they can’t keep with other people’s money and get away with it. If creditors come out on the short end, and are in danger of losing big in such settlements around the nation, maybe word will finally go out that cities with giant unfunded pensions and politicians willing to promise the sun and the moon are not good investments. If elected officials are substance abusers, creditors are often enabling them.

At any rate, get strapped in for a long recovery. The Stockton case will give us an idea of which method of therapy we’re in for. California comeback, baby!


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