Judge OKs debt plan for Stockton, California, 1 of largest US cities to declare bankruptcy

SACRAMENTO, Calif. – A judge on Thursday approved a plan that allows Stockton to leave bankruptcy protection by eliminating more than $2 billion in long-term debt payments without touching the city’s pension obligations.

The ruling by U.S. Bankruptcy Judge Christopher Klein marked an end to Stockton’s Chapter 9 status, first sought in 2012.

“This plan, I’m persuaded, is the best that can be done in terms of restructuring an adjustment of the debts of the city of Stockton,” he said.

The city successfully negotiated deals with all major creditors except Franklin Templeton Investments, which argued it was being treated unfairly. The investment firm said the city didn’t cut employee pensions while asking the company to walk away from collecting nearly $32.5 million it is still owed.

“Obviously we are disappointed,” Franklin Templeton’s attorney, James Johnston, told the judge about the ruling. “We will evaluate our next steps.”

Klein’s decision could be appealed.

Johnston was not available after the hearing for comment, and the firm’s spokeswoman, Stacey Coleman, declined in an email to elaborate.

Klein ruled earlier this month that bankruptcy law allows the city to treat pension obligations like any other debt, meaning the city could have chosen to trim the benefits.

However, it did not — a decision that Klein supported, saying the city’s plan to exit bankruptcy did not treat Franklin Templeton unfairly. He also noted that the city had cut employee pay and benefits, which had been higher that some comparable cities; eliminated millions of dollars in retiree health care coverage; and created a pension plan with lower payments for new employees.

“There already have been very substantial concessions,” Klein said. “It would be no simple task to go back and redo the pensions.

This year, Stockton will pay the California Public Employees’ Retirement System $42 million toward its pension costs, city spokeswoman Connie Cochran said. About $20 million will come from the general fund, a figure that amounts to 11 per cent of the fund.

Matthew Jacobs, CalPERS general counsel, praised Stockton for its decision against taking advantage of Klein’s ruling that the city could have cut its pension benefits. He also believes Klein made an incorrect decision on the issue last month.

Stockton attorney Marc Levinson said the case had no direct implications on other cities.

“If a city in the future wants to impair pensions, they can take a crack at it,” he said. “My client, Stockton, did not want to.”

Stockton, a city of nearly 300,000 residents 80 miles east of San Francisco, filed for Chapter 9 protection in 2012, making it the nation’s largest bankrupt city before Detroit filed for that status last year.

Elsewhere in California, Vallejo went through bankruptcy before Stockton. San Bernardino filed shortly after Stockton and has yet to present an exit plan.

Stockton City Manager Kurt Wilson said a lesson for other cities is to watch for the early signs of deep financial troubles and head them off before it’s too late. He said Stockton can now focus on providing services to residents, rather than waging the bankruptcy fight.

“This has been a very draining and ugly process,” Wilson said, adding that the city restructured its debts to bond market investors through the year 2054.

The bankruptcy cost Stockton more than $13 million for attorneys and consultants.

Stockton’s leaders say the city was victimized by an unforgiving boom-and-bust economic cycle.

Before the recession, leaders spent millions of dollars revitalizing the downtown area with a new City Hall and building a marina, sports arena and ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.

With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn’t pay its bills. The city slashed millions of dollars from its budget and laid off 25 per cent of its police officers. Crime soared.

Stockton Mayor Anthony Silva said he was pleased by the ruling but it was no occasion for city officials to pat themselves on the back. The retirees, current city employees and residents all suffered, he said.

“I advise other cities to keep a close eye on your finances,” Silva said. “I wouldn’t wish bankruptcy on anybody else.”