A federal judge ruled today that the Central California city of Stockton can enter Chapter 9 bankruptcy, a decision that other teetering locales are obsessing over because of a showdown over the city’s obligation to the state’s public employee pension plan. The city has been defaulting on much of its debt even as it makes required payments to the pension system—a state of affairs that waves a red flag in front of creditors who have seen, or expect to see, their principal erode in any restructuring.
After a series of increasingly dire public pronouncements about its fiscal ill health, the City Council last June filed for bankruptcy; Stockton is currently the largest U.S. city to enter bankruptcy, at least until Detroit does whatever it’s going to do. However, just because you say you’re broke doesn’t make it so—another California city that declared bankruptcy last year, Mammoth Lakes, was not allowed to proceed. In Stockton's case, a three-day court hearing last week examined the evidence for (cutting a quarter of the city’s police and a third of its firefighters, letting creditors seize city property) and against (those dratted payments to CalPERS), concluding Stockton genuinely cannot meet its obligations. It’s worth noting that while bondholders and city employees have already taken pretty drastic haircuts, official bankruptcy codifies—and in some cases enhances—the pain.
But while most people will look at the immediate repercussions of the default—"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 ABC News—we’ll be looking at how well the city rebounds. (And Judge Christopher Klein is leaving a bit of mystery in the process; he has not yet ruled on the specific question of whether the city must renegotiate is deal with CalPERS.)
Political scientist Shanna Pearson wrote about Stockton for us last November. Even as she described the city of 300,000 as a poster child for local-government fiscal disaster, she noted it was in an exceptional position to escape some of the long-term scarring once it emerges from Chapter 9. She even used the ‘L’ word—lucky—to describe “some small but vital ways” that Stockton is prepping for life after Armageddon.
Such as keeping a grant writer in employ. Or hiving off a quarter of its sales tax income specifically to transportation, which gives it a kitty to call on for matching grants. “This tool alone means that its investment in economic growth will far outpace that of many other cities across the country that are, ironically, too poor even to be eligible for such matching grants,” Pearson wrote for us.
As she concluded:
It seems that if they can get its bankruptcy worked out, Stockton may recover fairly quickly as a result of its unusual financial resources, but most other local governments are headed for a longer struggle.
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