House of cards – Who is next?

In Breaking News by Hal PetersonLeave a Comment

I recently posted to this web site a column published in the LI Herald titled “Municipal Bankruptcy Could Set a National Precedent.” It focused attention on the City of San Bernardino that is withholding pension payments to the sixth-largest pension fund in the world, the California Public Employees Retirement System. Reason, they simply do not have the money, and are trying to restructure debt. This column also mentioned a string of other municipalities that were experiencing similar problems.

On April the 1st, , a federal bankruptcy judge ruled that the City of Stockton (also in California) was  “eligible for court protection from its creditors, clearing the way for a battle over whether public workers’ pensions can be cut when the city they work for goes bankrupt.” The judge affirming the decision noted that he “could see battle lines being drawn between the above mentioned retirement system and other major creditors, including several Wall Street companies that either bought Stockton’s bonds or insured them.’

The City of Stockton, home for 300,000 residents, is in ruin. Businesses have closed, tax revenues are down, and concessions have already been reached with their remaining employees. What’s next?  The judge mentioned “there are very complex and difficult questions of law that I can see on the horizon, and he fully expects the creditors will contest whether the city’s ‘plan of adjustment’ is comparable to a ‘plan of reorganization’ in a Chapter 11 bankruptcy.

Have the capital markets creditors raised the unfairness issue prematurely? Will this particular municipality clear several legal hurdles before they can qualify for bankruptcy protection? Only time will tell. There are no winners in this case. We can be sure however, many at fault!


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