Stockton, California Is Officially Bankrupt

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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?

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  1. Fist!

    1. I mean, First!!

      1. Are you a bondholder? Because that means you’re actually LAST.

        1. I have a hard time shedding tears for anyone who would buy a munibond in CA and then be surprised when they get screwed. That’s like dating a known serial rapist.

          1. She thought she could change him!

          2. Especially a pension obligation bond. “We can’t figure out any way to pay our pension debt, so we would like to ‘borrow’ some cash from you to do so.”

        2. No, I’m pretty sure I’m not a bondholder. And if Obummer and the federal gub’mint don’t have to obey bankruptcy law, why should the city of Stockton? We’re a nation of men, not laws, right?

      2. No one means what they say or says what they mean around here.

        1. I don’t mean what I say. I totally mean that.

          1. This is all meaningless.

            1. Do you really mean that?

  2. Maybe Pavement can hold a benefit concert for their hometown?

    Naaaahhhhh. Probably not.

    1. Maybe Never Paid Taxes Nick will start paying taxes in Stockton if he’s forced to move out of Lodi.

  3. So is this the start of the tsunami?

    Arent there other cities in CA in a similar predicament? Same for parts of Illinois too correct?

    1. IL might just end up shipping its pensions to BK or the PGC. I think the legislature’s and the judges ones will survive, however…

  4. California is a joke.

  5. I got it! California cities can invest in the munis of other California cities! It’s a win all the way around!

  6. So when’s the law amending the bankruptcy code to prevent California munis from filing?

  7. The WSJ had a piece about this story in today’s paper and they listed this hilarious anecdote-

    Pensions for new workers were trimmed modestly, and the “Lamborghini” retiree health benefits?that’s city council member Kathy Miller’s description?entitling workers who had worked for merely six months to free lifetime medical are to be phased out. Yet as city officials attested, all of these “concessions” have merely brought the city into line with comparable cities?which are also slouching toward bankruptcy because of public employee pay and benefits.

    Maybe we should have them run Obamacare!

    1. Six months and you get access to the plan but have to pay the full premium (like COBRA) would not be too bad but this sounds more like they get free health insurance 4life. In which case, ROFLMAO.

    2. AFAIK, it’s for workers who had worked for merely six months and then retired.

      Still awfully generous. More here.

  8. I guess Dr. Klahn’s quote in Kentucky Fried Movie “Take him to Detroit!” could be substitued by “Take him to California!”. 😉

  9. Stay tuned for more “economic recovery”, plus a little green alien named Ozmodiar that only Paul Krugman can see!

  10. But didn’t Krugabe tells us very recently that all of the gloom and doom over CA is unwarranted, and that the state is doing just fine?

    You mean the Krugs was wrong?

    1. He never tires of making a complete fool out of himself.

  11. I suspect that lefties are chortling with glee over the way the creditors are getting buttfucked. Screw those evil greedy capitalists!

    What they don’t think about is the future, when businesses decide that it’s too risky to enter into deals with city governments like Stockton’s.

    1. The good news is that it’s going to become impossible to sell pension obligation bonds. Maybe any muni bonds in California.

  12. How is that smug asshole in the brown shirt not behind bars?

    -jcr

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