Judge: Stockton can go belly up

Bankruptcy CourtApril 2, 2013

By John Seiler

It’s official: The city of Stockton is bankrupt. On April 1, U.S. Bankruptcy Judge Christopher Klein ruled that Stockton’s bankruptcy can proceed. “It’s apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law,” he wrote.

Opinions were divide on whether the ruling helped the private bondholders, which wanted the court first to reduce the city’s generous pensions for retired public employees; or whether it helped the public-employee unions, which insist that the bondholders first take a “haircut” on their claims on city funds (which funds, of course, are provided by taxpayers).

The bottom line: “This was a preliminary round,” Dan Pellissier told me; he’s the president of California Pension Reform, which has been working to change state pension laws. “It didn’t get to the question people wanted to hear. It was more of an administrative decision.”

That wasn’t how it was seen by some. “In the context of going through the findings of fact, [the judge] made some comments about how Chapter 9 is all about giving them the ability to impair contracts because the only place you can do that is bankruptcy court,” bankruptcy lawyer Karol Denniston told the Inland Valley Daily bulletin. “He’s correct with all that, but it’s interesting that he chose to emphasize that.”

The contracts to be “impaired” would be those between Stockton and the unions concerning pensions. The California Constitution widely is interpreted as precluding the breaking of such contracts. However, this is a federal bankruptcy court. So it depends on whether the U.S. Constitution and federal law allow a federal judge to break such contracts.

“The ruling never addressed whether federal bankruptcy code trumped constitutional protection,” Pellissier said.

Pension problem

A different view from Denniston’s came from the Wall Street Journal’s editorial page, which wrote:

“The San Joaquin Valley city of 300,000 intends to use bankruptcy to stiff capital market creditors in order to pay for its workers’ rich pensions, which will merely encourage other insolvent municipalities to do the same.

“Stockton filed for bankruptcy last summer after a three-month confidential mediation with creditors failed to substantially reduce its long-term liabilities or close its $25 million deficit. Assured Guaranty and National Public Finance Guarantee, which insure about $260 million of the city’s bond debt, pulled out of negotiations after the city council refused to haircut the city’s single largest creditor, the California Public Employees’ Retirement System (Calpers).

“Meanwhile, the city was proposing to slash by 80% the $125 million in principal on pension obligation bonds that it had issued in 2007 to pay an overdue bill to Calpers. Never before has a bankrupt city reduced principal on its debt. In its Chapter 9 eligibility trial, Stockton nonetheless blamed bond insurers for negotiating in bad faith—an argument Judge Klein echoed in his ruling.”


“Everyone is over-interpreting,” Pellissier observed. “This was just Stage 1, whether the city is eligible for bankruptcy. They said, ‘We’re out of money after a perfunctory attempt to balance the budget.'”

As to the operation of the court, he said, “The role of a federal bankruptcy court is impairing contracts,” meaning the court decides which contracts are modified or voided. For example, in the 2009 General Motors bankruptcy, the federal court decided that the United Auto Workers union had precedence over bondholders, dealers and investors.

However, Pellissier said that federal court dealings with municipalities is different than those with private companies because of constitutional issues governing federal and state powers. “In the private sector, a judge can divide the assets himself,” Pellissier said. “For a municipality, he can only approve what the city wants to do.”

The problem is that if the pensions are the city’s No. 1 priority, then the only way to pay for them is to cut city services even more than they already have been. The Huffington Post reported that, since recent budget cuts that have reduced the number of police, murders in Stockton have soared. If taxpayers’ money mainly goes to the pensions of retirees no longer working for the city, it’s a good question why the city government even should exist.

Bond prices

Another factor with not only statewide importance, but national importance, is how slamming the bondholders first would affect municipal bond prices. If bondholders are more vulnerable than retirement funds, then bond interest rates would rise, making it harder for municipalities to borrow, in turn raising the costs for taxpayers.

Although given the foolish projects funded by many cities — such as the $47 million Stockton blew on a sports arena, which contributed to the bankruptcy — higher interest rates might cancel such follies in other cities. That would be a good thing.

The Stockton bankruptcy approval has implications for San Bernardino, which also declared bankruptcy last year. (Mammoth Lakes declared bankruptcy as well. But its problem was losing a lawsuit, not pensions.)

According to the Daily Bulletin, Stockton’s successful argument in court is “the same basic argument San Bernardino has been making since it filed for bankruptcy protection in August, and other cities might soon find themselves in similar situations.” Which means San Bernardino’s lawsuit also has a good chance of advancing.

The Stockton court decision also is a sharp warning to other municipalities and school districts — and to the state itself — to get their financial acts together. The state, in particular, needs to enact pension reforms much stronger than the weak “reform” enacted last fall to gull voters into supporting Proposition 30, the $6 billion tax increase.

Rhode Island, which is even more dominated than California by Democrats, bravely has undertaken pension reforms after the city of Central Falls went bankrupt.

Taxpayer funds are not unlimited. Spiking pensions more than a decade ago, as this writer warned many times back then, inevitably would lead to governments going belly up. Unless reforms are made soon, the bankruptcies are just starting.


Write a comment
  1. Ted Steele DD
    Ted Steele DD 2 April, 2013, 15:12

    LOL—- This judge will follow the law. You might not like that though.

    Reply this comment
  2. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 15:35

    Oh man– On another note— I bet those bond insurers wish they could have a do over! Maybe they should’ve played a little ball….hmmmmm……..

    Reply this comment
  3. Barb
    Barb 2 April, 2013, 16:02

    Good read! Most interesting case to watch!

    Reply this comment
  4. fish
    fish 2 April, 2013, 16:53

    They’re still going to stiff you Ted.

    Reply this comment
  5. CalWatchdog
    CalWatchdog Author 2 April, 2013, 17:10

    Ted: what “law”? Judges reinterpret the “law” all the time.

    — John Seiler

    Reply this comment
  6. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 17:12

    LOL— They don’t owe me any money little buddy! But—reading the tea leaves I think this judge is going to follow the law. The retired folks will be the VERY last people cut— the bond insurers drank too much of their own kool-aid ™.

    Reply this comment
  7. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 17:18

    John– Appeals Courts interpret the law and courts also follow the law–what you have here with Judge K is a smart fellow who will follow the law—maybe you don’t know much about him? I think the bond insurers might have seen what the city would do before they went hiking in the mountains……I have read every single published case in this area both fed and although not quite as rel. state—– I don’t think your ilk will like the result.

    Reply this comment
  8. fish
    fish 2 April, 2013, 17:29

    Ted you stink of govt employee and you’re not one of the elect. I wouldn’t count on those post retirement travel/vacation plans.

    Reply this comment
  9. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 17:38

    Fish– I stink? Oh no!

    U.S. Bankruptcy Judge Christopher Klein was sharply critical of bond insurers for walking away from pre-bankruptcy negotiations when Stockton refused to discuss cutting CalPERS debt.

    The bond insurers argued that Stockton had failed to negotiate with creditors in “good faith“ as required by law. The judge said bond insurers failed to negotiate in good faith when they “voted with their feet” to “stonewall” negotiations.)

    Hmmmmm—– Fishy—- I wonder what that means?

    You should be able to put a good spin on this? Right?

    Reply this comment
  10. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 2 April, 2013, 17:41

    I wish Rex the Poodle was still here— today might qualify for another of his famous failed predictions. I lost track but I think when we last heard from our intrepid well groomed little poodle she was 0 for 14 ? ™

    Reply this comment
  11. SkippingDog
    SkippingDog 2 April, 2013, 20:06

    Your reliance on Dan Pellissier is truly amazing, John, since he’s been right on so many things in his predictions about public pensions in California over the past few years. Didn’t he predict success by Moorlach in Orange County?

    Chapter 9 of the Bankruptcy Code is very well developed law, having been largely in place for nearly 80 years now. It is also very clear on the limitations of federal authority under the 10th Amendment when it involves state laws or governance. As it sits, CalPERS is in a very strong position, as are the public pensioners in Stockton and throughout our fair state.

    It’s always fun to watch you folks embrace the 10th Amendment when the federal government takes some action with which you disagree, and then embrace federal intervention in state law when you think you might be able to screw over your public employees for their pensions and wages to serve the interests of your business masters.

    As usual, Ted is correct in his assessment of this matter and your motives. You should listen to him.

    Reply this comment
  12. SkippingDog
    SkippingDog 2 April, 2013, 20:08

    Last I heard the poodle is a guest of the state, so he probably doesn’t have much computer access these days. I think that’s a good thing for all of us, but it was fun to read his nutty rants.

    Reply this comment
  13. Bob Smith
    Bob Smith 2 April, 2013, 21:45

    Stockton basically told the bondholders that they were the only people taking losses. The bondholders had no reason to continue “negotiations” because it wasn’t a negotiation at all, it was Stockton’s ultimatum to the bondholders. Stockton not giving an inch is ok, but the bondholders not giving an inch is “bad faith”. I can already see where this is going.

    Reply this comment
  14. fish
    fish 3 April, 2013, 07:18

    <i.You should be able to put a good spin on this? Right?

    Yes….you’re going to die hungry, sick, and destitute. I fail to see a downside.

    Reply this comment
  15. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 3 April, 2013, 08:17

    That’s a good spin? Yikes!

    I honestly thought you’d be able to spin this for the anti retired people forces.I guess I overestimated you.

    Reply this comment
  16. fish
    fish 3 April, 2013, 08:20

    I guess I overestimated you.

    Yes! Yes you did.

    I of course would never make that error with the General of the Retired People Forces.

    From where did General Steele retire?

    Reply this comment
  17. Ulysses Uhaul
    Ulysses Uhaul 3 April, 2013, 08:47

    Every municipal BK will be litigated enriching the total legal kanal no matter what result comes in Stockton.

    The real fear is who will backstop muni bonds in the future….your real property will be assessed in case of bond hiccups…..you watch…this legislation coming.

    Doomer’s living in single wides face little financial exposure…..so cool it!

    Reply this comment
  18. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 3 April, 2013, 13:00

    I retired from selling about a 20% int. in an insurance G.A. I worked for gov for about 10 years in the late 60’s——retied at 55…like most people I didn’t stay long in the gov– wages were crap compared to what I eventually made. What about you fish? Are you ANYthing?

    Reply this comment
  19. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 3 April, 2013, 13:02

    U haul— once again you’ve hit the nail on the head exactly——- the bond insurers were the bottom line here….. These doomers will chant their mantra till the cows etc.

    Reply this comment
  20. Validated
    Validated 3 April, 2013, 14:21

    Just imagine all that money for negative PR against public workers and they prevail in court again. The GOP needs to learn a failed message won’t work an 9th, 10th, 11th……. time. Neither pensions or bonds caused the crash but one will take a back seat so deal with it and quit crying.

    Stockton, San Jose and San Bernardino residents all feel the real effects of severe cuts to public pensions and benefits as Police and Fire leave for the sake of their families. Giving bond holders the same importance as CalPERS would be dangerous to the public.

    Reply this comment
  21. fish
    fish 3 April, 2013, 15:31

    What about you fish? Are you ANYthing?

    Certainly nothing compared to the magnificence that is the African Swarm of Ted Steele System. I guess it’s true Ted Men women want Teddy and men want to be Teddy!

    Reply this comment
  22. Donkey
    Donkey 3 April, 2013, 17:29

    Cut the pensions now, or even more latter!! I find it hard to believe that not one of the RAGWUS feeders sucking a living off the taxpayers have no ability to do simple math!! The well is dry you trough feeding simpletons, the demise your future is getting very serious, very soon. 🙂

    Reply this comment
  23. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 3 April, 2013, 19:09

    Thanks fish, your adequacy is deafening in here.

    Cal pers– 257 billion of dry well……lol

    Reply this comment
  24. CalWatchdog
    CalWatchdog Author 3 April, 2013, 19:29

    Ted: “I don’t think your ilk will like the result.”

    What “ilk” is that?

    The fact is I couldn’t afford to retire in this state no matter what, so I’ll be leaving soon enough and not have to pay for CA pensions anyway. At 57, I’m pretty much personally disinterested in what happens.

    The above article, if you read it again, didn’t take sides. And said it’s not clear how the judge will rule. Which I think remains. Often judges will feint one direction in a preliminary ruling, then go the other way. Not saying that will happen here, only that it could happen.

    The big problem is that the national recovery never actually happened after the last recession (which I blame on Republicans, actually: beginning with Greenspan, then Bernanke, Bush II, Phil Gramm, Dennis Haster, etc.).

    When the next recession hits, more cities will go bankrupt, even the state might; the pensions will nosedive.

    I’m from Michigan and remember how, around 1981, Highland Park went bankrupt during the Depression of those years; Michigan unemployment was 16 percent. The H.P. pensions all were wiped out. The retirees got nothing. It could happen here.

    — John Seiler

    Reply this comment
  25. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 3 April, 2013, 20:12

    What “ilk”? You know, the tea brewing in bags right, “that” ilk.

    Your article didn’t take sides? Laughable.

    Anecdotal pension stories like HP and a few airlines are anecdotal.

    You are semi correct on the recovery that “never happened”. But it could be that it has not happened like this one is happening.

    Keep open John, you’re smarter than that.

    Calpers, with nominal contributions can pay out for decades— by then—

    the delta on the econ will cycle
    the new tiers will provide relief
    your prostate will give out
    Rand Paul will still be just another wingnut.

    Reply this comment
  26. Donkey
    Donkey 3 April, 2013, 21:56

    Ted Steals, take a math course!! The whole pension scam is coming apart, your buddy Obama is helping it on its way with his QE2!! 🙂

    Reply this comment
  27. fish
    fish 4 April, 2013, 07:09

    Cal pers– 257 billion of dry well……lol

    yeah teddy lol…..

    Reply this comment
  28. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 4 April, 2013, 07:17

    QE2? LOL– You been living in a cave little buddy??

    The sky is falling!!!!!!!!!!! We are DOOOOOOOOOOOOOmed !

    Reply this comment
  29. Donkey
    Donkey 4 April, 2013, 07:38

    No Ted, You are doomed! 🙂

    Reply this comment
  30. The Africanized Swarm of Ted Steele System
    The Africanized Swarm of Ted Steele System 4 April, 2013, 10:03

    LOL– Poor Duncey— you’ve been saying that for years—– you are the North Korea of CWD

    Reply this comment
  31. fish
    fish 4 April, 2013, 11:56

    lol ted lol

    Reply this comment
  32. Jerry
    Jerry 4 April, 2013, 14:28

    What really shocks me—with increasing longevity and retirement benefits before the age of 65 (often considerably earlier) many if not most will be in retirement longer than they worked. Think our kids and grand kids will want to pay this bill, even if they could?

    Reply this comment
  33. SeeSaw
    SeeSaw 4 April, 2013, 16:29

    We were someones’s kids grandkids once, long ago–our parents and grandparents told us the same thing then. Go out and hear the birds sing, and revel in your freedom once in a while.

    Reply this comment
  34. eatingdogfood
    eatingdogfood 5 April, 2013, 22:43

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!

    Reply this comment

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