Bankrupt Stockton owes a lot of debtors a lot of money. On Friday, it told the public how it would like the divvy to go and indicated it had tentative agreements with some of its largest creditors to make it happen.
Stockton’s plan further reduces worker benefits, asks the voters for a tax increase to pay police, and pays some creditors less than they are owed. It will not, however, renege on its pension obligations—unless Judge Christopher Klein of the U.S. Bankruptcy Court in Sacramento says otherwise.
Dale Grinter, an attorney watching the case, told Bloomberg that the city’s plan was “like the throwing down of the gauntlet.” It was preceded by a year of verbal dueling.
For now, the city said it has the outline of deals with Assured Guaranteed over $124.3 million it owes on pension obligation bonds and National Public Finance Guarantee over $45.1 million in lease revenue bonds. The Wall Street Journal reported that the city had made deals with 14 of its 19 major creditor groups and negotiated a settlement with employees and retirees to reduce their claim from $538 million to $5.1 million.
Other creditors loom. The bondholders and insurers wanted Stockton to raise taxes, curtail city services, sell municipal property and bail on its obligations to the California Public Employees’ Retirement System (CalPERS) before asking them to take a haircut on $900 million in debt.
The city council, which must approve the plan before it goes to the judge, is scheduled to take it up Thursday.
The case pits U.S. bankruptcy law—which gives the judge vast authority to decide who gets dinged for a filer’s debts—against California state law that says funding for the pension plan cannot be monkeyed with. Stockton has continued to make payments to the pension fund throughout the negotiations, unlike the city of San Bernardino, which filed for bankruptcy in August and, with Judge Meredith Jury’s blessing, suspended its payments to CalPERS.
Stockton (pop. 300,000) was the largest city in the nation to declare bankruptcy until Detroit (pop. 700,000) filed for Chapter 9 protection in July. Amid talk of selling works from the well-regarded Detroit Institute of Arts (dibs on the Diego Rivera mural Detroit Industry), the federal government offered the city a $320 million package of aid.
It’s not enough money to make a serious dent in the city’s $18-to-$20 billion bankruptcy, but it is enough to seriously piss off Stockton-area congressman Jerry McNerney, a Democrat. “Stockton has been left behind and ignored by the White House,” McNerney wrote in a two-page letter to the President. “Your inaction and neglect of the San Joaquin Valley remain a common theme.”
McNerney rattled off a laundry-list of horribles afflicting Stockton, essentially describing the plight of many American cities that have declared bankruptcy, were teetering on the edge or merely suffering mightily from the after-effects of the Great Recession. None of them, until Detroit, have received help from the federal government.
He wrote: “Stockton has been at the forefront of the foreclosure crisis; continues to face high unemployment rates; struggles with an escalating crime rate; has significant challenges in the public school system; and was the largest city in the country to ever declare bankruptcy until Detroit declared bankruptcy earlier this year.”