Judge Allows California City to Enter Bankruptcy, Largest Municipality to go Bust

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. 

Bankrupt San Bernardino hires new manager for California city

San Bernardino was forced to look for a new city manager after its acting city manager, Andrea Travis-Miller, quit.

Her resignation coincides with the departure of the city's finance chief. Both had been the key officials overseeing the city's bankruptcyapplication and their departures threaten the city's ability to achieve it. They had more knowledge than anybody else of the city's finances and the experience to answer questions from the court and creditors.

The city council voted to hire Allen Parker to replace Travis Miller. According to his resume provided to the city, Parker has been an economic development consultant since 2006.

From June 2001 until December 2006, according to his resume, Parker was chief administrative officer of the Morongo Band of Mission Indians, a federally recognized tribe in California. Before that he was village manager of Maywood, Illinois.

The federal judge overseeing San Bernardino's bankruptcy application said in a court hearing on Tuesday that the new city manager would be confronted with a steep learning curve.

Various creditors are demanding a wealth of financial documents from the city. The city must also produce a detailed bankruptcy blueprint to explain how it intends to deal with its creditors, a key part of proving its eligibility for bankruptcy.

The city council considered two applicants for the job, and voted unanimously to hire Parker.

"Allen Parker brings a wealth of city management experience to San Bernardino," the mayor, Pat Morris said. "I have great confidence in his ability...to guide San Bernardino through the difficult decisions we must make in bankruptcy."

San Bernardino, a city of 210,000 about 60 miles east of Los Angeles, filed for bankruptcy protection on August 1, citing a $46 million deficit for the current fiscal year and little scope to meet its day-to-day expenses. It was the third California city to file for bankruptcy last year, following Stockton and Mammoth Lakes.

The city's biggest creditor, the California Public Employee Pension Fund (Calpers), has opposed San Bernardino's quest to seek bankruptcy protection. Without it, the struggling city will likely face multiple lawsuits in state court for unpaid bills, at a time when its officials say it can barely make payroll.

The city pegs its debt to America's biggest public pension fund at $143 million.

San Bernardino has not made its $1.2 million, twice monthly payment to Calpers since its bankruptcy declaration last August.

No city has ever unilaterally suspended payments to Calpers, which manages pension plans for state government employees and many municipalities and local government agencies around California.

The bankruptcy could be a test case as to whether the pensions of government workers take precedence over other payments in a municipal bankruptcy - a high-stakes issue for pension plans and their beneficiaries, and for the Wall Street bondholders who lend money to governments.

In a statement, Calpers said: "We are very pleased to have Mr. Parker stepping into his new role as city manager of San Bernardino and our executives have already reached out to him personally to welcome him and begin a dialogue with Calpers."

via Reuters