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Stockton Bankruptcy Highlights Pension Battle

From the Associated Press:

Judge rules Stockton, Calif., to enter bankruptcy

By Tracie Cone | April 01, 2013

SACRAMENTO, Calif. (AP) — The people of Stockton will feel financial fallout for years after a federal judge ruled Monday to let the city become the most populous in the nation to enter bankruptcy.

But the case is also being watched closely because it could answer the significant question of who gets paid first by financially strapped cities — retirement funds or creditors.

"I don’t know whether spiked pensions can be reeled back in," U.S. Bankruptcy Judge Christopher Klein said while making the ruling. "There are very complex and difficult questions of law that I can see out there on the horizon."

The potential constitutional question in the Stockton case is whether federal bankruptcy law trumps a California law that says money owed to the state pension fund must be paid…

And never mind that Stockton’s preposterously lavish pension plans are what bankrupted the city in the first place. In fact, Stockton currently pays 40% of its budget to retirees. You can work for Stockton for just six months and get a lifetime of healthcare benefits.

Bankruptcy could (and should) allow the city to adjust these unsustainable pension deals. But, of course, the government public sector unions will fight them tooth and nail.

Stockton has tried to restructure some debt by slashing employment, renegotiating labor contracts, and cutting health benefits for workers. Library and recreation funding have been halved, and the scaled-down Police Department only responds to emergencies in progress. The city crime rate is among the highest in the nation.

Since cities can’t liquidate assets, those that declare bankruptcy must come up with a plan for creditors to forgive some of the debt.

Holders of the biggest portion of Stockton’s debt insured $165 million in bonds the city issued in 2007 to keep up with payments to the California Public Employees Retirement System as property taxes plummeted during the recession.

Stockton now owes CalPERS about $900 million to cover pension promises, far the city’s largest financial obligation. Many struggling cities across California are in the same situation.

So far, Stockton has kept up with pension payments while reneging on other debts, maintaining it needs a strong pension plan to retain its pared-down workforce.

They have their priorities. After all, who cares how many people are murdered because of the lack of policemen on the street? They must pay those all of those hard working city employees who retired at 50 years old and who will now get 90% of their highest salary and ‘free’ healthcare for life.

Attorneys for creditors argued that it was unfair for their clients to accept reduced payments while the pensions negotiated in flush times went untouched. They argued that employees who shared the wealth during good times should bow have to endure some of the pain with cuts to their pensions…

What kind of crazy talk is that? Contracts are sacred. Unless they need to be violated in the name of ‘social justice.’

Legal observers expect the creditors to aggressively challenge the repayment plan presented by Stockton in the next phase of the process.

"That’s where it will be precedent-setting," said Karol Denniston, a municipal restructuring expert who monitored the trial. "Does bankruptcy code apply to CalPERS or not? If bankruptcy code trumps state law, then that’s huge and it has huge implications in terms of what happens next for other municipalities across California."

The state pension plan manages $255 billion in assets but was underfunded by $87 billion in 2011, the last time calculations were made. CalPERS is in the process of setting new rates to close the liability, said spokeswoman Amy Norris.

The changes could further strain at least two dozen other financially strapped cities, including San Bernardino, San Jose, Compton, Fairfield, Watsonville, Atwater.

"Just about everybody has an unfunded liability," Norris said….

The unions are only doing to cities what they have long since been doing to companies. Driving them out of business with their outrageous contracts. And then picking their bones after they go belly up.

This article was posted by Steve on Tuesday, April 2nd, 2013. Comments are currently closed.

One Response to “Stockton Bankruptcy Highlights Pension Battle”

  1. GetBackJack says:

    I have an image in mind of the Toga Party in ANIMAL HOUSE, and instead of the drunken sots chanting Toga! Toga! it ‘s now drunken sots chanting PENSIONS! PENSIONS!

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