City of Stockton Will Receive Judge’s Decision on Bankruptcy Proposal

The city of Stockton, CA, will find out on October 30 whether it can continue its financial recovery after declaring bankruptcy.

Stock is due to appear in court to ask U.S. Bankruptcy Judge Christopher Klein to approve its plan for reorganizing the city’s $900 million-plus in debt.

However, the city’s single creditor, Franklin Templeton Investments, argued that the city hasn’t considered using its pension fund to pay back the $32.5 million it owes. Klein ruled in October that Chapter 9 bankruptcies, like Stockton’s, could treat pension obligations like other debt.

This could spell trouble for the city’s residents and workers who depend on that pension plan, especially if it results in reduced benefits.

Michael Sweet, a bankruptcy attorney in San Francisco, said that there haven’t been any Chapter 9 bankruptcies that have attacked pensions.

Chapter 9, which relates to municipal bankruptcies, offers the chance for the city to pay off debt, unlike a Chapter 7 personal bankruptcy, which liquidates all assets and can affect an individual’s credit for about a decade.

Once the city has met with Klein, they may receive an approval, end up back in negotiations with Franklin Templeton, or have their bankruptcy claim rejected.

Stockton filed for Chapter 9 protection back in 2012, after Vallejo, CA. and before San Bernardino, filed for Chapter 9. Stockton was the nation’s largest bankruptcy until Detroit filed in 2013.

So far, the city’s officials have spent nearly $16.3 million on the Chapter 9 bankruptcy and have budgeted for about $25 million more, totaling around $41.3 million in the cost of the filing. Even worse, the city is expected to have around $48 million in settlements and obligations even after recovering from the bankruptcy.

City leaders blame the bankruptcy on economic problems brought on by the recession. Before it hit, they spent millions of dollars trying to revitalize the downtown area with the purchase and construction of a new City Hall, a marina, a sports arena, and a ballpark.

The city had issued 3,000 permits annually to build new homes, and police were paid premium wages and health benefits.

After the recession, the city experienced a rash of foreclosures, and even the new City Hall couldn’t pay its bills. The police force was cut by millions of dollars and 25% in personnel, which sent crime skyrocketing.

The troubles from years before could make things worse if pensions are cut, according to David E. Mastagni, an attorney for the Stockton Police Officers’ Association. “If they impair the pensions,” he said, speaking of the police force, “you’ll see mass walk-offs.”

Former City Manager Bob Deis, who helped create Stockton’s proposal, is hopeful that the plan will receive approval from Klein.

“I can’t imagine it would be a thumbs-down scenario,” Deis commented. “I am hopeful that it’s thumbs-up. It’s time for the city to be able to move on and get this difficult chapter behind it.”

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