Heading into bankruptcy Stockton, California had about $147 million in unfunded pension obligations and about $250 million in debt from various bond issues.
The city could have and should have shed some of those pension obligations and made changes in various pension agreements, but it didn’t.
It did shed bond debt for one cent on the dollar, subject to lawsuits.
Stockton Doomed to Another “Stigma of Bankruptcy”
The New York Times reports Stockton Return to Solvency, With Pension Problem Unsolved
Battered by a collapse in real estate prices, a spike in pension and retiree health care costs, and unmanageable debt, this struggling city in the Central Valley has labored for months to find a way out of Chapter 9. Now having renegotiated its debt with most creditors, cobbled together layoffs and service cuts and raised the sales tax to 9 percent from 8.25 percent, Stockton is nearly ready to leave court protection.
But what Stockton, along with pretty much every other city in California that has gone into bankruptcy in recent years, has not done is address the skyrocketing public pensions that are at the heart of many of these cases.
“No city wants to take on the state pension system by itself,” said Stockton’s new mayor, Anthony Silva, referring to the California Public Employees’ Retirement System, or Calpers. “Every city thinks some other city will take care of it.”
“They wanted to get out of bankruptcy in the worst possible way, and that’s just what they did,” said Dean Andal of the San Joaquin County Taxpayers Association, which fought the sales-tax increase. “If they go ahead and hire those new police officers, the city will be back in insolvency in four years.”
City officials insist their plan will work. “We got the tax, and thank God it passed,” Councilman Holman said. “I have confidence that the numbers line up.”
Nor does the Detroit ruling this week make Stockton want to revisit pension reductions. Connie Cochran, a city spokeswoman, said that city workers had already seen their pay and retiree health benefits cut. In addition, she said, Calpers told the city that its only option was to pay a $970 million termination fee to leave the system, and Stockton could not afford it.
Mayor Silva said the city’s plan would help it out of bankruptcy sometime late next spring, if all goes well, after the judge hearing the case has time to rule on its fairness and viability and negotiations can be completed with one final bondholding creditor.
“We will lose the stigma of bankruptcy, and it will buy us time,” he said.
Getting Out of bankruptcy the Worst Possible Way
I am hoping the judge tells Stockton its plan is not viable (for the simple reason it isn’t viable).
Raising taxes is not the way you deal with preposterous pension obligations.
When CalPERS told the city “the only option was to pay a $970 million termination fee to leave the system” the city could have and should have spit in their face (not literally of course).
The polite way of doing that would have been a balanced blend of pension haircuts and bond haircuts.
Instead, by putting 100% of the burden on bondholders, the city virtually ensured inability to issue further bonds at a reasonable interest rate. Moreover, the city punished taxpayers, and did nothing to fix untenable pension obligations.
Stockton is doomed unless the bankruptcy judge handing the case sends Stockton back to the drawing board.
Mike “Mish” Shedlock