In a closely-watched ruling with potentially far-reaching effects, a federal bankruptcy judge has ruled Stockton, CA may proceed with cutting health care benefits for retirees while it is in bankruptcy. This seemingly tiny crack in the dike protecting public pension benefits could easily turn into a major breach and perhaps even threaten the dike itself. Yes, this is that serious. Those who want to break public unions and their pensions will be lining up on one side while those defending the pensions will frantically be looking for ways to block bankrupt municipalities from restructuring labor and pension agreements.
On Tuesday, Stockton California said talks with creditors had failed and prepared to file Chapter 9 bankruptcy. They will be the largest American city ever to do so and the results will be closely watched by other struggling municipalities, public employees, Wall Street, hedge funds, and bondholders alike. If Stockton is able to structure their debt and pension obligations, then other cities will be emboldened to do the same.
Imagine if you will, that you are a retired public employee of Stockton, like John Skaff who requires knee replacement surgery and is being told his retirement medical benefits will be so deeply slashed that he may not be able to afford the surgery. Some say pension benefits were bloated, but there’s a human side of the story here too
Stockton CA borrowed to build their new city hall, couldn’t make the payments, and the bank has seized it. The city decides today whether whether to make bankruptcy contingency plans if negotiations with creditors fail (which they almost certainly will.)
A bankruptcy filing means the city will be able to break existing contracts and agreements with public labor unions and Wall Street creditors, all of whom will be doing whatever they can to stop Stockton from filing. This bankruptcy will be widely watched.
Stockton is preparing to default. Santa Ana is outsourcing its fire department. They are not alone. Other California cities, like Bakersfield, are similarly in peril. Much of the problem is due to debt taken on during the real estate bubble and overwhelming public pension liabilities.
Probably the only way out for most of these cities is filing bankruptcy then renegotiating contracts and debt terms.