Court: California City May Proceed With Bankruptcy

A U.S. federal judge in April approved the city of Stockton’s petition for bankruptcy in a case that sets the stage for a lengthy battle between bondholders and the California pension system.

In a case being studied by other cash-strapped American cities including Detroit, U.S. Bankruptcy Court Judge Christopher Klein’s decision was a setback for bondholders and insurers who had resisted the California city’s bankruptcy filing. Stockton is the largest U.S. city ever to file for bankruptcy.

The judge also signaled that the California Public Employees Retirement System’s position in the case was not above review. Stockton, a city of 300,000, has so far not reduced pension payments to retired city workers, although it has eliminated retiree healthcare benefits.

“This does not mean there is not potentially a serious issue involving Calpers,” Judge Klein said. “But at this point I do not know what that is.”

The decision on Stockton marks the start of a lengthy restructuring of the obligations overwhelming its finances, which were crippled by the housing crisis and recession.