Pension Issue in Stockton, Calif., Bankruptcy
On its first official day in bankruptcy, the city of Stockton now must grapple with the hard part of reorganizing its financial affairs — how to share the financial burden equitably among creditors while meeting its massive state pension obligations.
At the conclusion of a three-day trial, a judge on Monday formally granted the city Chapter 9 protection, over the objections of creditors who questioned whether it was fair for the city to fully meet its obligations to the state pension system while other debt holders go partly paid.
The issue — whether federal bankruptcy law trumps the California law that requires pension fund debts to be honored — could have huge implications across the state and the rest of the nation, experts say.
“The fear is that there is going to be a run on the bank,” said bankruptcy attorney Michael Sweet, who has been monitoring the Stockton trial. “Everyone is going to be cutting CalPERS” payments if Stockton is allowed to do it.
California’s $225 billion Public Employees Retirement System already is underfunded by $87 billion, which means there are more payments due to retirees than there is money in the system.