Stockton Bankruptcy Goes to Judge

The City of Stockton Bankruptcy case has finally gone to Judge Christopher Klein for ruling and recommendation. The glaring issue that Judge Klein gave no hint on as to which way he will rule is whether CalPERS pension benefits deserve some special protection as opposed to other creditors. Other large creditors, including Franklin Templeton Investments, has vehemently argued that pension benefits for both retired and active employees are simply another financial obligation of the City, and therefore deserve no special protection. As such, they should suffer a reduction just like every other creditor. Not surprisingly from the start, the City has taken the position that pension benefits are simply untouchable, and a reduction in pension benefits has never been part of the City’s financial reorganization plan.
Judge Klein’s ruling will not only have big implications on the City of Stockton, but also on other municipalities throughout California, and possibly nationwide. The City of San Bernardino has a pending municipal bankruptcy proceeding where its pension obligations are a big issue. The largest municipal bankruptcy, the City of Detroit, also has a massive pension issue to deal with. And many other municipalities out there that are on the verge of bankruptcy, or otherwise in financial trouble are eying pension obligations as possible cutbacks.
Pension obligations, through CalPERS or other retirement systems are becoming larger and larger components of city and county budgets. Several factors have driven pension costs higher in recent years, including enhanced benefit formulas and significantly increased wage levels. Also, increase longevity and true-cost accounting methods have required municipalities to devote more money to funding pensions. How judge Klein rules will have implications well beyond the city Stockton and its bankruptcy proceedings.