Stockton city officials and attorneys are reporting to court today to begin a four-day trial arguing that they are entitled to bankruptcy protections. Creditors argue that the City has failed to negotiate in good faith and should be denied Chapter 9 protection.

Many consider the courtroom drama a formality, and it is expected that by the end of the week Stockton will have begun bankruptcy proceedings. Creditors – excluding CalPERS – are hoping to stall the City’s efforts to cut payments on bonds to just pennies on the dollar. During rounds of pre-bankruptcy negotiations, the City offered 17 and 18 cents per dollar.

Bond insurance companies, among others, say that the City failed to negotiate in good faith with creditors because it failed to address the largest creditor – CalPERS. Refusing to address the largest of the debts shows a lack of political fortitude and unwillingness to address the largest challenges facing the City.

CalPERS, however, contends it is not a normal creditor as it is legally barred from reducing pension benefits. If the City were to terminate its contract with CalPERS – which started in 1945 – the City would have to immediately pay the full actuarially calculated cost of benefits for all current and future retirees. That would run roughly $950 million.

Read the full article at the Orange County Register.