Court Says Stockton, Calif., Can Declare Bankruptcy

A federal judge on April 1 decided that the City of Stockton, Calif., would be able to file for Chapter 9 bankruptcy.

The City filed for bankruptcy on June 28, 2012. Chapter 9 bankruptcy provides financially distressed municipalities protection from its creditors while it develops and negotiates a plan for adjusting its debts.

U.S. Bankruptcy Judge Christopher Klein said creditors acted in bad faith by not attempting to negotiate with the City, according to the Los Angeles Times.  Stockton officials said creditors would not negotiate until the City decided it would cut payments to the state pension plan, California Public Employees Retirement System (Calpers), which it did not do.

The City of San Bernardino, Calif., also recently declared bankruptcy. It faces the same case before a judge, but a Chicago Tribune analysis said the cases are significantly different, which could lead to different outcomes. While Stockton stopped paying bondholders, continued paying Calpers, and tried to negotiate, San Bernardino did not cut its budget before declaring bankruptcy and instead declared a financial emergency.

The Washington Examiner states that the Stockton ruling could open the possibility of cities cutting payments to Calpers. State law dictates that municipalities cannot cut payments to Calpers, but a federal court could rule that U.S. bankruptcy law overrules state law.