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The second city in California to file for federal bankruptcy is Stockton. As of the first of this year, 13 municipalities in the U.S. had filed for bankruptcy. Detroit was the most recent city in the U. S. to file. The biggest issue these cities face is how to handle what amounts to their largest financial obligation: retirement pensions for their employees.
Stockton’s program is tied to CalPERS, the California State Employees Fund. This month, U.S. Bankruptcy Judge Christopher Klein made a ruling that could potentially be a game-changer for the behemoth that is CalPERS, proclaiming Stockton has the right to reduce pension payments and to cut ties with the program.
These bankruptcies were the result of the bust in the housing market in 2008, which cost many Americans their homes and jobs. While the government bailed out the banks that caused the bust, another casualty of the housing bust were the cities where these foreclosed homes were located. Each foreclosure robbed the cities of property taxes that supported city services. Where is the federal bailout for these cities?
Unable to pay for these services, the debts incurred became insurmountable, and with creditors pressuring for payment, the cities opted to file for bankruptcy.
As the proceedings slowly move forward, cutting pensions is a sticking point that none of them want to implement. Detroit has agreed to cut pensions by 4.5 percent and is negotiating to give city property to the companies holding the loans for pension plans.
Although Vallejo, California was able to keep its pensions intact, the city remains insolvent and will likely have to refile for bankruptcy.
Fueling Stockton’s problem on this issue is the fact that one of its creditors, Franklin-Templeton, is unwilling to accept the city’s offered settlement. The Sacramento Bee reports:
Franklin Templeton wants Stockton to reduce its CalPERS payments to free up more cash to repay the loan. It said the proposed repayment amounts to just 12 cents on the dollar, while other creditors are due to receive 50 cents to 100 cents on the dollar.
San Bernadino, a California city that filed bankruptcy one month after Stockton, suspended payments to CalPERS during their proceedings and reportedly will make some concessions to reduce pensions.
Franklin will not admit to forcing Stockton’s hand in the matter. They want an agreement that includes a gradual increase in payments as the city’s resources are increased.
Franklin’s objections have caused U.S. Bankruptcy Judge Christopher Klein to make a groundbreaking ruling, allowing Stockton to break agreements with the California sacred cow of CalPERS to reduce payments and free up money to other creditors. His ruling does not demand that Stockton take this action, but it does give them permission.
The final decision on the city of Stockton’s asset disbursement will be made later this month and could be used to define future similar cases. This could be the beginning of a reduction in the power of CalPERS and possibly a redefinition of the state employees retirement system.
Whether or not this case will be its undoing remains to be seen.
Read Cindy’s original post here.
Featured image from Shutterstock
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