◼ A judge accepted the California city of Stockton's bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy. - CNBC
Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city's tax base
The city's creditors wanted to keep Stockton out of bankruptcy—a status that will likely allow the city to avoid repaying its debts in full....
The $900 million that Stockton owes to the California Public Employees' Retirement System to cover pension promises is its biggest debt. So far Stockton has kept up with pension payments while it has reneged on other debts, maintaining that it needs a strong pension plan to retain its pared-down workforce.
◼ Union Greed Drives California to Bankruptcy- Steven Greenhut/Union Watch via ◼ Stop Special Interest Money Now
If (Judge) Klein sides with the city, then municipalities will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course — i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons that they went bankrupt in the first place, such as lush pay and pensions. Bankruptcy will no longer be a policy of last resort. This should have an impact on bond markets.
If the city wins the case, argued March 25-27 in the Sacramento federal courthouse, then the public-sector unions and the scandal-plagued California Public Employees Retirement System are right. No matter what problems befall a city, public services and taxpayers suffer first while union members and public retirement systems are protected....
In the 1990s, Stockton granted its employees some of the most generous and unsustainable labor contracts in the State of California.… Safety employees could now retire at the age of 50.… Many safety retirees today earn 90 to 100 percent of what they made when they were still on the job.
That’s common. But Miller noted that:
Stockton went even further than most other cities and granted things like unlimited vacation and sick time that could be cashed out when an employee retired, and added pay categories for almost everything imaginable.… Our public safety employees were costing us on average more than $150,000 a year each. That’s three times more than most of us in Stockton make in a year.
She described the “Lamborghini” health plan the city’s employees received:
This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton.
Absurd pay and benefits are common, and not just in Stockton. San Francisco Chronicle columnists Matier and Ross revealed recently that an Alameda County executive receives a $423,000 a year pay package for life. Compensation for California firefighters is in the $175,000 a year range. Some Newport Beach lifeguards receive $200,000 a year pay packages. As a friend of mine joked, revolutions have been fought over lesser instances of public pilfering.
Stockton pulled back on some abuses, but has left the main problem in place. Why is it OK that Stockton residents have to put up with closed parks, reduced policing and other cutbacks to protect outrageous pension and pay levels?
◼ Stockton bankruptcy can move forward, judge rules - LA Times
Klein said the creditors could not legally walk away from the table, but he left the door open for CalPERS obligations to be part of negotiations in the coming phases of the bankruptcy.
At issue will be whether U.S. bankruptcy law trumps California law, which says the pension plan must be funded.
The $900 million Stockton owes to the California Public Employees Retirement System to cover pensions is its biggest debt -– as is the case with many cities in California.
Stockton slashed its police and fire departments, halted bond payments, cut employee benefits and adopted an emergency spending plan that cut many city services. But the city continues to pay into the state pension.
Stockton's bankruptcy is expected to be closely watched for precedent, and could be appealed as high as the U.S. Supreme Court.
◼ The people of Stockton will feel financial fallout for years after a federal judge ruled Monday to let the city become the most populous in the nation to enter bankruptcy. - Bloomberg's Business Week
But the case is also being watched closely because it could answer the significant question of who gets paid first by financially strapped cities — retirement funds or creditors.
"I don't know whether spiked pensions can be reeled back in," U.S. Bankruptcy Judge Christopher Klein said while making the ruling. "There are very complex and difficult questions of law that I can see out there on the horizon."
◼ Pension Issue Still Alive Despite Stockton Bankruptcy Decision - Joel Fox/Fox & Hounds
The results of the Stockton officials’ efforts will reverberate across the state. San Bernardino and Mammoth Lakes also face bankruptcy and the question of dealing with the shortfalls while ignoring the pension payouts will likely arise in other places.
Should Stockton eventually need to get court permission to rip up its pension contracts, other cities will consider how to deal with pension burdens before the bankruptcy wolf is at the door.
Keep an eye on the biggest fish of all – the City of Los Angeles.
