Stockton, California approved by judge for bankruptcy exit

November 5, 2014

And you thought your finances were complicated…

A California judge has approved the city of Stockton to exit bankruptcy despite arguments by some, mostly creditors, that it is unfair.

Judge Klein said “I’ve looked long and hard at this case and the responses that have been made, including the alternative of putting the whole situation back to Square 1, which is what would be required [if the plan were rejected].”

His argument was largely that of economic pragmatism, saying that to reject the plan would necessitate the need to formulate an alternative, with legal costs running into the millions and probably not offering a comparable added value.

Judge Klein stated that “this plan, I’m persuaded, is about the best that could be done, or is the best that could be done.”

Those against the plan and their lawyers argue that under normal Chapter 11 bankruptcy conditions, prospective employee benefit cuts are standard. The fact that this is missing from the approved plan has angered some. However Judge Klein stated that he believed the other “significant concessions”, such as retiree health benefits worth an estimated $550 million, were enough to offset the need for other employee benefit losses.

Previously, (before the huge financial issues) Stockton had promised city employees free healthcare in retirement for them and their dependents. Additionally, Stockton is one of many California cities which offers retirement to police as young as age fifty, and a pension as high as a ninety percent of their pay for those with thirty years of employment (in addition to annual cost-of-living increases).

The pension plan was supposed to not cost the city much due to investment gains tied into the program, but a bumpy financial system means that the burden will not be offset as greatly as previously hoped.

CalPERS, the California state pension system, has said that if Stockton goes into bankruptcy and decides to cancel their contract with the organization, then Stockton would be on the hook for the $1.6 billion that is currently and will be owed to city retirees. They are calling this a “cancellation fee”.

CalPERS states that they hold a lien against the city that, in the event the city does not payout this fee, they are able to essentially repo city assets.

However Judge Klein during his judgment said that federal bankruptcy lies supreme over the state law drafted for Stockton’s lien, and that therefore when push comes to shove, the lien is non-existent.

So when it comes down to the bottom of the mess, all that is left between CalPERS and the city of Stockton is a contract, and as Judge Klein said, “Bankruptcy is all about the impairment of contracts…That’s what we do.”

Larry Bellomo is a Laguna Hills bankruptcy and family attorney with over three decades of experience in the field. If you are in need of an attorney in the Orange County area, give us a call and find out what we can do for you.