Stockton, Calif., became the most populous U.S. city to enter bankruptcy proceedings when a judgeaccepted the city’s application for bankruptcy on Monday, saying it would not be able to provide basic services otherwise.
The ruling is the latest in a case that pits federal bankruptcy law against state pension laws.
The city’s creditors opposed bankruptcy, fearing it will mean they won’t get their money. Since the 1930s, bondholders in most major municipal bankruptcies have been fully repaid. But Stockton and several other cities in bankruptcy proceedings are expected to break with that tradition, according to Reuters.
Stockton’s biggest debt is its $900 million obligation to the California Public Employees Retirement System, which the pension agency says cannot be touched even in bankruptcy. The question is whether federal bankruptcy laws will trump state pension laws.
“That’s where it will be precedent-setting. 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,” attorney Karol Denniston told the Sacramento Bee before the ruling.Stockton has stopped paying its all its creditors except CalPERS. The city requested a hardship funding extension so it could reduce current payments, but the retirement system said no, SacBee notes. CalPERS also denied a request to reduce a 5 percent cost of living increase Stockton’s pension contract requires. Stockton says its pension benefits are necessary for hiring and retaining employees, but it hasn’t tried very hard to negotiate over its $29 million-per-year payments, either. As Steven Greenhut, vice president of journalism for the Franklin Center for Government and Public Integrity, noted in the Orange County Register on Friday, it’s easier for Stockton to short its creditors than the unions benefitting from those pension payments. Pension debt has been the downfall of several other cities in California and elsewhere. San Bernardino, which is also in bankruptcy proceedings, took a different approach to its debt and stopped payments to CalPERS in August, according to the Wall Street Journal. CalPERS itself is hurting for cash after losing $100 billion in the stock market during the recession, and recently gave tentative approval to a 50 percent rate hike for pension payments, which would sink struggling cities further into debt.