After hearing arguments and testimony at a trial lasting just three days, Chief United States Bankruptcy Court Judge Christopher M. Klein approved the City of Stockton’s petition for chapter 9 bankruptcy relief, filed on June 28, 2012. The City defended its eligibility, while attorneys representing several large financial creditors in the case asked Judge Klein to reject the City’s petition. The primary objections were related to the question of good faith and to whether the City was insolvent when the bankruptcy filing was made.

Specific objections focused on the City’s not requesting that CalPERS restructure or impair employee or retiree pensions and suggesting what the City might have done differently, in the years leading up to its bankruptcy filing, in order to avoid bankruptcy.

“We are very pleased with Judge Klein’s ruling,” said Anne Stausboll, Chief Executive Officer for CalPERS. “We recognize the difficult decisions the City of Stockton needs to make to restore its financial and economic health. Today’s action gives the City the opportunity to propose a forward looking plan of adjustment in the bankruptcy case that will allow them to restore long term financial stability and to provide essential services to the Stockton community through the City’s valued public employees.
At the time the City filed for bankruptcy, it had already addressed $90 million in General Fund deficits in the three prior years and was faced with over $26 million in General Fund deficits in fiscal year 2012-2013. Prior to bankruptcy, the City had completed 90 days in pre-bankruptcy confidential mediation with its largest creditors, attempting to avoid bankruptcy, and in compliance with new State law. The City paid all the costs of this mediation process when the Capital Market Creditors refused to pay their share. During the mediation, the City submitted a detailed 790-page restructuring proposal for consideration by the creditors. While the City was able to make agreements with its labor unions, the end result was not enough, leaving no alternative but to seek bankruptcy protection.

“After nine months and millions of dollars in legal fees, the Judge validated what we have been saying from the beginning, that the City is insolvent and needs the protection of bankruptcy to adjust its debts,” said City Manager Bob Deis. “The next steps are to confirm a Plan of Adjustment through the restructuring of our debt, begin the recovery process and move Stockton forward.”

Due to a combination of private sector investment and government projects, the City of Stockton’s unemployment rate, which peaked at 17.6 percent in 2010, is on a steady decline. Job growth in the Stockton area was two percent in 2012, and is projected to continue growing at a similar pace. Home values have increased more than 10 percent in the past year, and industries such as agriculture and logistics have witnessed marked improvement.

“Today’s decision marks a new day for the City of Stockton,” said Bob Gutierrez, spokesperson for Stockton Forward. “While we still have a long road ahead, we now have a starting point to move forward. Collaboration, cooperation and dedication from Stockton’s leaders and citizens are key to a strong recovery. Stockton Forward is ready to help bring together our community to restore and rebuild the region – local leaders, city staff, law enforcement, community groups and engaged citizens. We have already begun to see an improvement in our local economy and it’s just the beginning. The best is yet to come for Stockton.”

Read the details on the rulings at the US Bankruptcy Court website.