Thread: Judge allows California city to enter bankruptcy, largest municipality to go bust

Judge allows California city to enter bankruptcy, largest municipality to go bust

Published April 01, 2013

Stockton, Calif., became the most populous city in the nation to go broke Monday, after a judge accepted the city's application to enter bankruptcy.

In the closely watched decision, U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services. He determined Stockton would not be able to perform "its obligations to its citizens on fundamental public safety as well as other basic government services without" the protections provided under bankruptcy proceedings.

Stockton was facing a $26 million shortfall when it filed for bankruptcy last summer, the result of the housing bust and soaring pension obligations. After cutting a quarter of their police force and other city services to the bone, officials argued bankruptcy was their only option.

The city of nearly 300,000 people has become emblematic of government excess and the financial calamity that resulted when the housing bubble burst.

Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city's tax base.

The city's creditors wanted to keep Stockton out of bankruptcy -- a status that would likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

Matthew Walsh, an attorney for the bond holders, declined to comment after Monday's ruling.

Attorneys for the city said the city's budget and services had been cut to the bone.

"There's nothing to celebrate about bankruptcy," said Bob Deis, Stockton's city manager. "But it is a vindication of what we've been saying for nine months."

The Chapter 9 bankruptcy case is being closely watched nationally for potential precedent-setting implications.

The $900 million that Stockton owes to the California Public Employees' Retirement System to cover pension promises is its biggest debt. So far Stockton has kept up with pension payments while it has reneged on other debts, maintaining that it needs a strong pension plan to retain its pared-down workforce.

The creditors who challenged Stockton's bankruptcy petition are the bond insurers who guaranteed $165 million in loans the city secured in 2007 to pay its contributions to the CalPERS pension fund. That debt got out of hand as property tax values plummeted during the recession, and money to pay the pension obligation fell short.

Legal observers expect the creditors to aggressively challenge Stockton's repayment plan in the next phase of the process.

By 2009 Stockton had accumulated nearly $1 billion in debt on civic improvements, money owed to pay pension contributions, and the most generous health care benefit in the state -- coverage for life for all retirees plus a dependent, no matter how long they had worked for the city.

The Associated Press contributed to this report.

Read more: Judge allows California city to enter bankruptcy, largest municipality to go bust | Fox News

Stockton CA bankrupt, San Bernardino could be next

By San Bernardino County Sun (CA) April 2, 2013 12:23 pm

Stockton became the largest city in the nation to be approved for bankruptcy protection on Monday, a ruling that some say could spark a rush of cities across California to file for bankruptcy protection.

U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services.

"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Klein said.

The city of nearly 300,000 filed for bankruptcy in June, after the bursting of the housing bubble led to a 70 percent decline in property tax revenues and a wave of foreclosures.

Yet its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. The city's creditors wanted to keep Stockton out of bankruptcy, a status that will likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

Attorneys for the city said the city's budget and services had been cut to the bone.

"There's nothing to celebrate about bankruptcy," said Bob Deis, Stockton's city manager. "But it is a vindication of what we've been saying for nine months. "

It's the same basic argument San Bernardino has been making since it filed for bankruptcy protection in August, and other cities might soon find themselves in similar situations.

And so Stockton's case has been closely watched for potentially precedent-setting implications.

"We're very glad to see Stockton's eligibility was approved and hope ours soon will be, too," San Bernardino City Attorney James F. Penman. "From what I've read in press reports, his interpretation of bankruptcy law matches ours. "

'Stampede' to bankruptcy?

Klein's decision isn't binding on other bankruptcy judges, but with very few cities having gone through Chapter 9, any decision he makes could prove influential, said bankruptcy attorney Karol Denniston.

That's particularly true if Klein says a bankrupt city can change its pension agreements - an inclination many read into his comments Monday.

"You could probably project that there might be something of a stampede to bankruptcy court if there's a ruling in Stockton that says contracts can be impaired," Denniston said.

Those agreements are the largest source of debt in many cities - including Stockton and San Bernardino - and according to state law can't be changed. But others argue that under the U.S. Constitution federal bankruptcy law trumps state law.

Klein's comment that CalPERS is a "garden variety" creditor and that the purpose of bankruptcy is to restructure debt suggest Klein agrees, according to Denniston.

"In the context of going through the findings of fact, he made some comments about how Chapter 9 is all about giving them the ability to impair contracts because the only place you can do that is bankruptcy court," Denniston said. "He's correct with all that, but it's interesting that he chose to emphasize that. "

So far Stockton has kept up with pension payments while it has reneged on other debts, maintaining that it needs a strong pension plan to retain its pared-down workforce.

The creditors who challenged Stockton's bankruptcy petition are the bond insurers who guaranteed $165 million in loans the city secured in 2007 to pay its contributions to the CalPERS pension fund.

That's a mirror image of San Bernardino, where bond insurers have supported bankruptcy filing of the city of 210,000, but CalPERS is objecting partly because the city stopped making required pension payments since filing in August.

That debt got out of hand as property tax values plummeted during the recession, and money to pay the pension obligation fell short.

Legal observers expect the creditors to aggressively challenge Stockton's repayment plan in the next phase of the process.

Former Mayor Richard Riordan, who suggested Los Angeles consider declaring bankruptcy two years ago, said he would not be surprised to see a rush of other cities seeking a similar restructuring of pension costs.

But, beyond that, he said the ruling could have wide repercussions for cities throughout California.

"If I was a union leader, I would be shaking in my boots," Riordan said. "I think the unions ought to be scared stiff. This could be a lot worse than just the pensions. What about government bonds? If government bonds can also be restructured, who will buy them?

"The city and the state all issue tax anticipation bonds to meet their payrolls, but if those can be restructured, no one will buy them. Think about what that means for libraries, parks, street paving, police. It will all be on the line.

"I think there could be a rush of cities now filing bankruptcy just to deal with their pension costs. "

Riordan said he would do all he could at this point to avoid declaring bankruptcy but would urge the unions to return to the bargaining table to make concessions on pensions, salaries and other costs.

Los Angeles City Administrative Officer Miguel Santana said as the city has struggled with tight budgets for years, it has made every effort to avoid filing for bankruptcy, including reforms to rein in pension costs. He cautioned cities that might be looking at the ruling as an easy way to deal with pensions should understand that bankruptcy carries other problems.

"You have to consider what it is like for people to live in a city that declares bankruptcy," Santana said. "Bankruptcy is not a panacea. It makes it difficult to recruit the best and brightest for employees. People don't feel comfortable living in a city that declares bankruptcy and it's hard to convince businesses and people to move to a city in bankruptcy. "

Leverage

Santana said Los Angeles has been successful in pushing through new pension tiers for sworn personnel and civilians as well as winning concessions from unions on contributions to the pension and health care costs.

"The mayor and City Council have been firm in dealing with the unions and we have been doing all we can to avoid bankruptcy," Santana said.

In San Bernardino, Jim Morris, the mayor's son and chief of staff - a former lawyer who stressed he wasn't a bankruptcy expert - doubted any wider rush toward bankruptcy was coming.

"You've got to actually be insolvent, which is not a good place to be but it's where Stocktion and San Bernardino are," he said. "There may be other cities that are perilously close to that. I don't know. But the idea that there would be this sort of scramble for bankruptcy, I think that would soon be swept away from the court because it's not intended to be a remedy of choice but a last measure. "

Bankruptcy attorney Michael Sweet of San Francisco-based Fox Rothschild said employee unions should watch carefully.

"Obviously, the city would have to meet the good faith requirement and the other requirements, but cities that are in a similar situation to Stockton might conclude that they can use the threat of bankruptcy to bring creditors to the table. And depending on how CalPERS ends up being treated in the Stockton bankruptcy, there might be precedent created. "

In its legal battles with San Bernardino, CalPERS has warned that leaving pension payments open would lead to a domino effect that could wreck the system, and so no impairment of its contracts should be allowed.

In a statement Monday, CalPERS praised Klein's decision.

"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," said CEO Anne Stausboll.

"The city has consistently acknowledged the importance of providing benefits to its employees through its existing relationship with CalPERS consistent with state law. CalPERS will continue to act as a fiduciary and protect and defend the integrity and soundness of the Pension Plan. "

In Rialto, city officials have floated tax measures as a means to pay its bills. While a tax on petroleum companies failed in November, voters in March passed an extension of the utility-users tax, which makes up more than 20 percent of the General Fund budget.

City Administrator Mike Story said his city has followed the Stockton case.

"We're aware of them moving forward," Story said. "What we will do is probably get together with our city attorney and determine what it means. "

Mired in its own budget deficit, Rialto has been cautious about discussing bankruptcy as a way to get out its costly pension obligations.

"Right now we're still concentrating on negotiating with our employees and balancing our budget for July," Story said.

Mayor Jim Righeimer of Costa Mesa - a city that has seen battles over employee costs include layoffs and outsourcing efforts - said by phone Monday that public pensions are in need of reform.
"The issue with our city is we spent a big chunk of money on contracts and pensions," Righeimer said.

Reporters Rick Orlov and Josh Dulaney and the Associated Press contributed to this report.---A service of YellowBrix, Inc.

http://www.gopusa.com/news/2013/04/02/stockton-ca-bankrupt-san-bernardino-could-be-next/?subscriber=1

Judge Napolitano Slams ‘Reprehensible, Immoral’ Spending Habits Of Now-Bankrupt Californian City

by Andrew Kirell | 3:12 pm, April 2nd, 2013V
» 7 comments

On Fox’s America Live this afternoon, senior judicial analyst Judge Andrew Napolitano took on the news of how a judge ruled that Stockton, Calif., can become the first American city to declare bankruptcy by slamming the local government’s “reprehensible” spending habits that led to their dodging debt obligations via insolvency.
“Stockton is the beginning of a very long train,” Napolitano said before recalling all the various debts the city holds to other government bodies. “Where is the money going to come from?” he asked.

“This is reprehensible what the politicians did in order to get votes,” he continued. “How did they get votes? By giving lavish deals for people who will continue to keep them in office. They either never thought they’d run out of cash or the cash would run out not on their watch; and they also, of course, wrote laws that would benefit themselves because the politicians making these laws would themselves be pensioners some day. So these pensions are lavish and generous and noncontributory, comes from the taxpayers.”

Host Megyn Kelly responded that “we want our firefighters and police officers to be taken care of,” but the city’s financial situation has led to massive slashes in health and recreation deals.
“This is a causal relationship to the profligate ways that the people who ran the city … have been running it,” the judge said, before adding that “the total unfunded liability of state and local governments for their pensions — pension payments they must make which they do not now have — is in excess of 4 trillion dollars.”

Ultimately, he concluded, cities like Stockton are pushing their debt onto later generations. “And it’s reprehensible, immoral, not authorized by the Constitution,” he said.

Watch via Fox: at the page link

http://www.mediaite.com/tv/judge-nap...ifornian-city/

41% in Bankrupt Stockton Don’t Speak English at Home; 21% Can’t Speak It Very Well

April 3, 2013

By Terence P. Jeffrey

(CNSNews.com) - In Stockton, Calif., which has just entered into Chapter 9 bankruptcy, 41 percent of the people do not speak English at home and 21 percent cannot speak it very well, according to the U.S. Census Bureau.

Data that the Census Bureau developed on what it calls the “social characteristics” of Stockton during the five-year period from 2007 to 2011, indicate that this city, located eighty miles east of San Francisco in California’s San Joaquin Valley, had a population of 289,926.

Of those 289,926 people, 76,869 (or about 27 percent) were foreign born, according to the Census Bureau. Of these foreign-born, 43,084 (or about 15 percent of this city’s total population) were not U.S. citizens.

Looking at the subset of Stockton's population that was five years old or older (264,713), the Census Bureau estimated there were 119,991 people who did not speak English at home. These 119,991 people equaled about 41 percent of Stockton’s overall population of 289,926 people and about 45 percent of the 264,713 people in the city who were five years old or older.

The Census Bureau also estimated that there were 59,577 people over the age of five in Stockton who “speak English less than ‘very well.’” These 59,577 people in Stockton who had not mastered English equaled about 21 percent of the city’s total population and about 23 percent of its residents who were five years or older.

The Census Bureau estimated that there were 76,869 people in Stockton who were foreign born. This included 33,785 naturalized U.S. citizens and 43,084 people who were not U.S. citizens.

That means the foreign-born population of Stockton (76,869) equaled about 27 percent of the city’s total population and the 43,084 non-naturalized foreign nationals equaled about 15 percent of the city's total population.

According to the Census Bureau, the two regions of the world contributing the largest number of foreign-born residents to Stockton were Latin America and Asia. 37,886 people in Stockton (13 percent of the total population) were born in Latin America and 35,820 (12 percent of the total population) were born in Asia.

While the Census Bureau data does distinguish between foreign-born residents who have been naturalized and those who have not been naturalized, it does not distinguish between non-naturalized foreign nationals who are in the United States legally and those who were not.

http://cnsnews.com/news/article/41-b...k-it-very-well