Stockton California May Proceed with Chapter 9 Bankruptcy

Yesterday a federal judge in California ruled that, despite the objections of bondholders and bond insurers, the city of Stockton could proceed in the process of Chapter 9 bankruptcy. Stockton is a city of almost 300,000 located about 90 minutes east of SanFrancisco Stockton was hard hit by the housing bubble and saw a 16% decline (page 345 of the PDF) in general fund revenue from FY 2008-2009 to FY 2009-2010.

After facing "an immediate and severe fiscal crisis" in early 2012, Stockton became the largest municipality to file for bankruptcy after negotiations with creditors in June 2012failed to alleviate a budget shortfall for the following fiscal year. Stockton had approximately $700 million in bond debt and CalPERS -- the California Public Employees Retirement System -- has the largest claim with nearly $150 million in unfunded pension liabilities according to Reuters. See the following list of creditors for more information. Also see more information about the bankruptcy including objections from creditors.

Opponents of the bankruptcy filing contended that Stockton "didn't meet eligibility requirements because it had failed to negotiate in good faith with creditors [...] before filing for bankruptcy and because it was not actually insolvent." These opponents argued that Stockton could have further raised taxes and cut expenses in order to pay back obligations. Several of the creditors further contended that the Plan of Adjustment the municipality's debt was unfair since CalPERS was given special treatment over other creditors such as bond insurer Assured Guaranty.

Judge Klein, presiding over the case, disagreed with this argument and ruled in favor of the City of Stockton finding that the municipality "had done more than necessary to demonstrate its eligibility." As Stockton navigates through the Chapter 9 proceedings, it will be closely watched by other municipalities drowning in pension costs. As NPR notes, "[i]t's possible that more cities will declare bankruptcy in the future - or threaten to, in their negotiations with creditors - if it becomes a way to get out from under crippling pension debt."