Stockton, California Is Officially Bankrupt

In perhaps the least surprising bit of California news in the last year or so, a U.S. Bankruptcy Court judge ruled yesterday that the city of Stockton can proceed with Chapter 9 bankruptcy. This makes Stockton the most populous city in U.S. history to go bankrupt, though certainly not the only Golden State municipality to do so.

The news is unsurprising because Stockton filed for Chapter 9 more than nine months ago due to the crushing debt of its public-sector pension and salary obligations, which amounted to more than $800 million. Bankruptcy always seemed all-but-inevitable, yet it was prolonged by Stockton's creditors who, understandably, question the city's priorities in repaying the state pension system CalPers before repaying bondholders. Via Reuters:

Creditors have claimed a lack of good faith by Stockton in its decision to fully pay its obligation to the $254 billion Calpers system but impose losses on bondholders and bond insurers.

The expected move by the California city of 300,000—along with Jefferson County in Alabama and San Bernardino in California—breaks with a long-standing tradition to fully repay bondholders the principal in most major municipal bankruptcies.

That the judge's ruling leaves the issue of public salaries and pensions open-ended means that Stockton's legal battles are likely far from over. In Stockton, as in the rest of California, public pensions are the issue. Despite the  optimistic, early celebration from progressives that California has taxed its way out of the hole, the reality of a 304 percent increase in public pension contributions over the past decade compounded with fewer potential taxpayers calling California home means that something's gotta give. In Stockton, that something was the public services that taxes traditionally funded in the days before six-figure pension and benefit packages. But the city's general fund, meant to be for basic city services such as police and fire, was gutted by the poor fiscal decisions, resulting in a 26 percent reduction in city police and, soon after, record murder rates.

Below, check out Reason TV's coverage of Stockton back in August 2012 for plenty of finger-pointing and blame-shifting from former and present city officials and union representatives. An especially interesting character is former city manager Dwayne Milnes, who presided over the city's finances during much of the free-spending '90s. He now runs an interest group representing Stockton's retired public employees. He tends to view himself and Stockton's government as pure victims of circumstance.

"I've seen cities that have this same pension system," said Milnes. "When you ask who's going to tip over, it's not 'Who is providing the pension benefits?,' it's, 'Who is providing the pension benefits in an economic environment that can't support it?'"

But the lingering question is, can any economic environment support California's lavish pension benefit system in the long term?