Stockton shows that bankruptcy is no way to cut pension debt

Redevelopment of the  Stockton marina was one of the spending projects that preceded the city’s bankruptcy filing.
Redevelopment of the Stockton marina was one of the spending projects that preceded the city’s bankruptcy filing. Sacramento Bee file

Imagine for a moment that you have run into deep financial trouble and have decided to file for bankruptcy protection. Your credit rating plummets, your home is sold at a fire sale, and you can’t rent an apartment or buy a car. You spend long hours at the negotiating table as creditors pick over the remains of your finances. Ultimately, you place your future in the hands of a total stranger, the bankruptcy judge.

Isn’t that a scenario that you would try to avoid at all costs?

If the consequences for an individual facing bankruptcy are devastating, the consequences for a municipality are 10 times as dangerous. Bankrupt cities face soaring crime rates, shrinking property sales, and the reduction or elimination of basic public services. It’s is not a decision that an elected official or city manager would willingly make unless there were no other options, as the decision by a bankruptcy judge presiding over Stockton’s bankruptcy makes clear.

Judge Christopher Klein’s ruling Thursday to approve Stockton’s bankruptcy plan confirms that the situation in Stockton will have little impact over the larger national debate on public pensions. Municipalities will not be filing for bankruptcy in waves in efforts to jettison pension debt.

For the very few severely distressed cities that may consider bankruptcy, the question will not be whether they can reduce pensions, but whether they should. In Stockton, the answer to that question was clear to all with a stake in Stockton’s future – and after two years of litigation that cost tens of millions of taxpayer dollars, the bankruptcy judge agreed.

Throughout the bankruptcy process, the people of Stockton have been through hell and back. Judge Klein said that the length and cost of the bankruptcy process, and the likelihood of protracted litigation, will give any cash-strapped city considerable pause before considering a bankruptcy filing. As exemplified by Stockton, the process lends itself to mischief. Franklin Templeton, the lone holdout in the bankruptcy settlement, used the process to hold the city hostage and prolong court proceedings in an effort to extract the best deal for itself, at the expense of taxpayers. In Detroit, bond insurers Syncora and FGIC extracted significant concessions from the city based on little more than threat of continued litigation and associated legal expenses.

Stockton’s creditors may have wanted the city to cut its pension benefits to free up more cash for themselves, but the city needed to do just the opposite to honor its pension promises to employees to retain them and recruit quality personnel. Public safety workers had already taken wage cuts and lost their retiree health care package in negotiations, so city leaders wanted to leave pension benefits untouched to prevent a mass exodus of public safety personnel. The idea was to prevent repeating the mistakes of San Jose and San Diego, where pension benefits were slashed and public safety officers left in droves, resulting in crime spikes and other serious problems.

Despite the media attention to cities such as Stockton and Detroit, municipal bankruptcy is exceedingly rare. According to one analysis, 13 local governments had bankruptcy filings since 2008. Five of those have been dismissed. To put it in context, there are more than 39,000 local governments in the U.S.

Although the bankruptcy process threatened to rob Stockton of its ability to make the best decisions for its residents, ultimately the judge accepted the city’s decision. In Stockton, the practicalities of running a city with an eye toward a brighter future shaped this outcome. Judge Klein acknowledged the serious and considerable pre-bankruptcy concessions accepted by Stockton’s employees, and the virtual guarantee that employees would leave to work elsewhere if Stockton reduced their compensation any further.

Stockton faced a unique set of circumstances brought on by revenue losses and a crippling national recession. Thankfully, it’s a situation that the overwhelming majority of municipalities will never have to face. As much as pension opponents would like to focus their analyses of Stockton as a blow to pension security, bankruptcy is simply not a practical or desirable option for cities dealing with pension obligations.

Teague Paterson, a Sacramento attorney, filed an amicus brief in the Stockton bankruptcy case on behalf of the Peace Officers Research Association of California.