Originally posted at www.foxandhoundsdaily.com
Ever since the city of Stockton issued bonds as a means of paying off its pension debt in 2007, it has been in a slow, steady march to the expected city bankruptcy that was approved, fittingly on April Fool’s Day, 2013. The irony of the declaration is that the U.S. Bankruptcy Judge who is overseeing the case said that Stockton might have to cut payments to its pension fund, the one obligation up to this point Stockton has consistently maintained that it needs to fully pay off. If Stockton has to cut pension payments, it will probably make the city’s other creditors more willing to share their pain but has the potential to create a much broader fight statewide.
Up until the filing, Stockton has consistently taken steps to address virtually all areas of cost containment in its reach. The city’s crime rate has soared not only due to a weak local economy but also due to slashing police services by up to 25 percent. Other municipal services have also been cut as the city’s budget has been trimmed. Still, the city simply cannot afford to cut services any further, and this past summer, made the decision to file for bankruptcy.
In the bankruptcy filing itself, Stockton has not only taken steps to try to reduce recurring debt payments but also the principal it actually has to repay to bondholders — a step no other city in California has taken up to this point. Further, Stockton has made moves to reduce healthcare obligations, including for city workers, an area of significant cost growth that most other state and city governments have refused to touch. If Stockton is able to go forward with these moves, both the healthcare reductions and bond payment reductions would be precedent setting unto themselves. However, up to this point, there has been one precedent the city has been completely unwilling to make: reducing payments for its pension obligations.
Stockton, like many other cities, agreed to join into CalPERS, the state pension fund, so that the state could manage the pensions for current and retired city employees. This meant that Stockton is liable for any and all pension fund changes mandated by the state legislature. However, like many cities, Stockton did not keep up with its pension obligations, although its case was more extreme. The one problem is that CalPERS has made it very clear that it will fight any attempt by any city to forego any portion of its pension obligations, including lengthy court battles. Partly because of this, Stockton has consistently prioritized pension payments over all other obligations, resulting in its declaration in its bankruptcy filing that it would keep full payments for its pensions. The judge’s declaration that this may not be able to continue is a red flag for CalPERS, as it could set a precedent of other California cities cutting payments or obligations, and create severe pressure on the entire fund. Previous municipal bankruptcies either involved cities with their own pension plans such as San Bernardino, or did not touch CalPERS obligations. It is this precedent that Stockton did not want to set, one that may in the end become the biggest single issue in the entire bankruptcy.
Kevin Klowden is the Director and Managing Economist for the California Center