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A judge cleared the way for the city of Stockton in California to enter bankruptcy today. That makes the city the largest in the U.S. to do so.
“Obviously the folks who have the most at stake are the bondholders,” says Michael Sweet, a bankruptcy lawyer with Fox Rothschild in San Francisco.
But the other 800-pound gorilla in the room? That would be members of the city’s pension plan. Stockton promised to what they owed to pensioners but “the judge said he isn’t sure that the city could do that and still meet its requirements under the bankruptcy law and get a plan confirmed.”
And that’s why so many other cities across the country are paying close attention to Stockton today. “There are cities across the country that are suffering what Stockton suffered with revenues going down or at least remaining stagnant at a time when costs are going up for both the pension plan and for health care,” said Sweet. Back when the economy was booming, these cities “made promises to their employees for extraordinary pensions and defined benefit programs and now they’re having trouble meeting the cost of those promises.”
So what’s next for the city of Stockton? The city next has to present a bankruptcy plan that would need to be approved by a judge. It would detail how the city will get itself out of bankruptcy. That process could take about six months to a year. But if there is an appeal, the process could drag on for much longer.