OUR VIEW: Stockton will be widely watched

April 3, 2013 

Stockton is broke.

What everyone but some Wall Street financiers conceded months ago is now official. Federal Bankruptcy Judge Christopher Klein declared it so on Monday. "The city of Stockton was, by any measure, insolvent on June 28," the judge said, "specifically, cash insolvent, unable to pay debts as they came due."

The next urgent order of business is for Stockton to come up with a plan of adjustment, to put its fiscal house in order. Until it does, the city of 290,000 cannot address comprehensively the most basic responsibility of any municipal government -- to protect the health and safety of its residents.

To that end, this week the Stockton City Council is expected to approve an ambitious crime reduction plan. Dubbed "Stockton's Marshall Plan," it involves police sweeps and gun seizures in the city's hot spots, community response teams, housing and treatment for the mentally ill and much, much more.

Service cuts and concessions from its labor unions, including pay and benefit reductions totaling 23 percent for city employees, have freed up some money to allow Stockton to hire more officers.

But the plan of adjustment that the city negotiates with its creditors in bankruptcy is key to Stockton's rescue. High crime and record homicide rates seriously impede the city's ability to improve its fiscal condition.

Stockton cannot attract businesses, retain good employees or build strong neighborhoods if it doesn't deal effectively with its crime problem. Money freed up in bankruptcy negotiations with creditors is needed to help Stockton finance its violence reduction plan.

But the outcome of those negotiations remains very much in doubt.

Challenged by bondholders, the city was forced to waste many months and millions of dollars in legal fees just to prove it was insolvent.

Significantly, the judge did not dismiss the bondholders' major contention that they were being singled out for reductions while the city's biggest creditor, the California Public Employees' Retirement System, is not being touched. If the city presents a plan of adjustment that does not include reductions to CalPERS, the city's other creditors are likely to appeal.

So, the real question being asked in Stockton -- the one that Wall Street, public employee unions, and cash-strapped municipal governments across the country want answered -- is: Can public employee pensions be cut when a city goes bankrupt? California has long held that pensions are vested rights that, once granted, cannot be taken away or reduced. In his findings, Klein raised doubts about that, acknowledging that Stockton potentially raises serious issues involving CalPERS.

"But at this point, I do not know what that is. I do not know whether spiked pensions can be reeled back in," the judge said, strongly hinting he will probably have to address the question.

Klein will have his hands full balancing these interests, and a lot of people will be watching.

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