Court Says City of Stockton, California May Proceed with Bankruptcy

April 1, 2013 – In The News
Chicago Tribune

A federal judge on Monday 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.

The judge also signaled that the California Public Employees Retirement System's (CalPERS) 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.

Michael Sweet, a municipal bankruptcy lawyer with Fox Rothschild who is not involved in the case, said the judge's remarks suggested that "somewhere along the line the city will have to go to Calpers, because otherwise they will have problems with discrimination in the plan."

A plan of adjustment, like any bankruptcy reorganization plan, cannot favor one group of creditors over another.
"You're going to see an issue teed up that could go to the U.S. Supreme Court," Sweet said.
Calpers asserts that California law protects pensioners from any haircut even in bankruptcy, but that position has never been tested in court.

This article also appeared on Michigan public radio WKZO.