News Column

Stockton Bankruptcy Can Proceed, Judge Says

April 1, 2013
Stockton, Calif. (file photo)
Stockton, Calif. (file photo)

The city of Stockton, Calif., can continue in bankruptcy as a federal judge Monday rejected legal challenges by Wall Street creditors.

The ruling by U.S. Bankruptcy Judge Christopher Klein means that the city of more than 290,000 residents can continue to seek protection from its creditors as the largest city in America to declare bankruptcy.

In his 90-minute "finding of facts," Klein portrayed Stockton has having negotiated in good faith with creditors that insured a city pension bond and issued bonds for a downtown redevelopment, including a sports arena.

He also declared that the city took major steps to right its fiscal ship, including a 25 percent reduction in its police force and major cuts of city staff and services, after Stockton became ground zero for housing foreclosures and the national mortgage crisis. By the time it sought bankruptcy last summer, the city has slashed $90 million in three years.

Declaring that Stockton has met the burden to continue in Chapter 9 municipal bankruptcy, Klein said, "The city of Stockton was by any measure insolvent ... cash insolvent" and "unable to pay debts as they came due."

He said the city, which last year endured a record number of murders, needed to stay in bankruptcy for both its fiscal and social well being. "It is clear that the city would not be able to perform its obligations to its citizens, such as fundamental matters of public safety," he said.

In a blistering critique, the judge assailed major Wall Street bondholders, Assured Guarantee Corp. and National Public Finance Guaranty Corp., for acting in a heavy-handed manner by refusing to negotiate the city's bond debt unless Stockton took actions to cut its massive employee pension obligations.

Klein concluded that National Public Finance and Assured "each took the position that there was nothing to talk about" unless the city sought concessions from the California State Employees Retirement System, to which it was paying $29 million a year. The city and CalPERS argued that pension costs had to be met.

"The translation (was that) if you don't intend to impair CalPERS, we're not going to talk to you," Klein said of the creditors. "They absented themselves from all discussions ... And, having voted with their feet, there was no point in talking to them further."

The judge ruled that Stockton had put forth a reasoned effort to resolve its massive fiscal debt but received "nothing but a stonewall on the other side."

He also chastised the city's creditors for refusing to pay their required share of costs of pre-bankruptcy mediation, declaring, "The capital market creditors did not negotiate in good faith. And therefore, they do not have the ability to complain."

In a sobering courtroom analysis, Klein chronicled Stockton's historic slide towards bankruptcy as Stockton, over betting on sustained tax revenues from a real estate boom, bankrolled a downtown redevelopment and doled out generous employee benefits on top of a "multi-decade, largely invisible pattern of above-market compensation for public employees."

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