U.S. Bankruptcy Judge Christopher Klein ruled Monday on the most important question facing Stockton, Calif. — whether it could enter into federal bankruptcy protection.
Klein agreed that the city is, in fact, broke.
But he didn't decide the question of whether the city must renegotiate its pension obligations, as some of its creditors had hoped.
"He did put off for another day the question of whether the pension holders would have to be part of any debt reduction solution," says Robert G. Flanders Jr., who was the state receiver appointed to oversee the troubled finances of Central Falls, R.I.
It's possible that, as Stockton draws up its plans for getting its financial house back in order, it will revisit its pension obligations, though the city has been reluctant to do so.
Klein did not force the city's hand in this regard, though he made it clear this could remain an issue going forward.
"The pension question may be presented in a number of different ways," says James Spiotto, a municipal bankruptcy attorney in Chicago. "Why rule on something you don't absolutely have to rule on?"
Millions At Stake
Like many other cities, counties and states, Stockton's pension fund is millions of dollars in the hole. Typically, pension obligations have been held sacrosanct, even as bondholders and other creditors lose money in bankruptcy proceedings.
As is the case with most other California localities, Stockton's pensions are managed by the California Public Employees' Retirement System, or CalPERS, the largest pension fund in the country.
Gone Bust
The biggest municipal Chapter 9 bankruptcies in the U.S., and the approximate debt.
Jefferson County, Ala. (filed 2011) — $4,200,000,000
Orange County, Calif. (filed 1994) — $1,974,000,000
Stockton, Calif. (filed 2012) — $1,032,000,000
San Bernardino, Calif. (filed 2012) — $492,000,000
Vallejo, Calif. (filed 2008) — $175,000,000
— James Spiotto of Chapman and Cutler LLC