Stockton, California’s Debt Problems May Set Precedent

By John Petersen, Governing

Under a new California law governing municipal distress, Stockton has entered into a mandated mediation period before it can file for bankruptcy under Chapter 9 [see Bankruptcy in Anytown, USA, page 11]. The city, state, employees, retirees and bondholders — not to mention the citizens — have a lot riding on how the story unfolds. Moreover, the unfolding could have major consequences for public employee pension plans and bondholders nationwide.

Stockton faces an avalanche of obligations that it cannot meet. Foremost among them are contributions to public employee pensions, as well as debt service on bonds earlier sold to fund its pension contributions. All told, the retirement-related annual payments by the city amount to about $37 million of its total budget of $196 million, not including another $17 million spent on retiree health care. With only $1 million left in its cash balances, the city is on the brink of collapse.

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