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Morning Examiner: Stockton bankruptcy just the beginning of California’s woes

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Politics,Beltway Confidential,Conn Carroll

In yesterday’s New York Times, Paul Krugman declared that, thanks to what he views as enlightened liberal Democratic rule, California was on a comeback. “Liberal big spending and overpaid public employees” are not “bringing on collapse,” Krugman wrote, “California isn’t a state in which liberals have run wild.”

Somebody forgot to give Krugman’s column to U.S. Bankrupcy Court Judge Christopher Klein. Mere hours after Krugman’s article was published online, Klein ruled against Stockton, Calif., bondholders who were suing to stop the city’s bankruptcy plan in federal court. In his findings of fact, Klein detailed how liberal big-spending policies, including major infrastructure investments, led directly to the largest municipal bankruptcy in the nation’s history. Klein’s decision also singled out lavish employee benefits that were given on top of a “multi-decade, largely invisible pattern of above-market compensation for public employees.”

Yes. Liberals did run wild. And now Californians are paying the consequences. In finding that Stockton had done all it could to avoid bankruptcy, Klein also noted that the city had already cut its police force by 25 percent, and that the city suffered through a record high number of murders last year.

But despite yesterday’s ruling, the fight over debt in Stockton, and the rest of California is far from over. Not only did Klein open the door for the city’s bondholders to take significant payment and principal cuts, but he also left open the possibility that the California Public Employees’ Retirement System (Calpers) would see their payments cut, too. Under state law, cities may not cut their payments to Calpers. But a federal court could rule that U.S. bankruptcy law trumps state law. That would open the door for hundreds of California cities to cut their payments to Calpers, which would only send the state government deeper into debt because Sacramento would have to make up the missing payments.

California still has the nation’s highest unemployment rate, the nation’s highest poverty rate, and a third of the entire nation’s welfare recipients. Contra Krugman, it may be a little too early to declare a California comeback.

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