Stockton to Receive Bankruptcy Protection: A Precedent Affecting All of Us

bankruptcy
In my article published July 9, 2012, (The Fall of Stockton, California?: Pensions, Foreclosures, Overspending) I wrote about Stockton – the largest U.S. city ever to file for bankruptcy and the implications that could occur if the bankruptcy was accepted.

Yesterday, April 1st, Stockton was ruled eligible for bankruptcy protection under Chapter 9 of the U.S. bankruptcy code in Federal Court after three days of testimony and arguments and ending with a 2-hour hearing today.

California law protects pensions. Today’s ruling from Federal Court supercedes state law and we now have history in the making. There will be massive “fallout” with bondholders and pensioners.

Stockton, will have to restructure millions of dollars worth of debt held by Wall Street creditors who have been fighting against the city’s bankruptcy.

This ruling today will have far-reaching effects especially the $900 million owed to the California Public Employee Retirement Systems (CalPERS) in pensions.

Stockton’s largest debt and reason for filing bankruptcy are the pensions promised to city employees and retirees. Stockton’s pension obligations are millions of dollars in the hole. Like many California cities, employees were able to retire at 50 or 55 years old, each averaging nearly $30,000 per year. During the 1990’s the city expanded generous healthcare benefits and owed $417 million to its retiree medical program. Under Stockton’s healthcare, a retiree and his/her dependent receive healthcare benefits for life – even if they had only worked one month for the city.

Stockton has been paying the pensions, even borrowing $165 to help pay the pensions – but in doing so, reneged on other debts. Many other cities are lined up to file bankruptcy and it’s feared these cities were waiting on today’s ruling. Mammoth Lakes and San Bernadino, California have already filed for bankruptcy protection.

During the mid-2000’s, Stockton had overbuilt and accumulated almost $1 billion of debt. They built a beautiful marina, high-rise hotel and promenade mostly financed by credit (bonds). Stockton reinvented itself and had a higher working class by 2009. People moved to Stockton and a housing boom was in full-swing. Starter homes were $400,000, much lower in price than the 80-mile-away- San Francisco homes. Then, the housing market went bust. As the housing market kept falling, the property taxes fell, and the city kept paying out the pensions. Unemployment rose and homes went into foreclosure.

Stockton has the highest metropolitan foreclosure rate in the United States with 1 in 25 homes foreclosed on which is three times the national rate. The unemployment rate in Stockton is 18.7% (January statistics), 4.6% more than it was in November 2012.

Bond insurers (Assured Guaranty Corp, Assured Guaranty Municipal Corp and National Public Finance Guarantee Corp) were joined today by Wells Fargo Bank, Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund in contesting Stockton’s bankruptcy. They stand to lose millions of dollars – which will be passed down to investors

Nationally, the unfunded bond market is $3.9 trillion. Today’s ruling will impact the entire municipal bond market. The municipal debt market provides financing for various public capital projects from new buildings such as schools to stoplight installation and sidewalks. You can begin to see how far-reaching today’s ruling affects even the jobs associated with the bonds not being repaid, or paid pennies on the dollar. Bondholders will suffer the losses. Before today’s ruling, bondholders have always been repaid all their principal since the 1930’s.

Stockton now has to come up with a plan to pay what it can. Under bankruptcy Stockton will have to decide which bills to pay without fear other creditors will force asset sales and cuts in services. Restructuring its bills may at least help some of the creditors who might not have received any money at all.

Analysts believe Detroit, Michigan will be the next large city to file bankruptcy surpassing Stockton as the largest U.S. city to file for bankruptcy. A dozen other large cities are rumored to be next in line to file bankruptcy and all were waiting to see how today’s Federal Court Ruling went.

Keith A. Gantenbein, Jr. is a Colorado a consumer advocate attorney, foreclosure defense and real estate attorney located in Denver and servicing all of Colorado. His foreclosure defense practice includes foreclosure prevention, foreclosure assistance, loan modifications, short sales, and all other foreclosure defense legal assistance. He also handles bankruptcies, mortgage negotiations, lender liability, real estate, civil litigation, debt defense, debt harassment, contracts and landlord/tenant. If you think you will be facing debt collection, foreclosure, or are in the foreclosure process, or have had a wrongful foreclosure, contact Keith Gantenbein at (303) 618-2122 for a one-hour consultation where he will discuss your situation and go over all your options with you.

About theglawfirm1

Gantenbein Law Firm is a Denver, Colorado Tax Law Firm, servicing all of Colorado. Gantenbein Law Firm also specializes in Colorado Real Estate Law, Colorado Foreclosure Defense, Wills & Trusts, and Business Law.
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