The bankrupt cities San Bernardino and Stockton, California share similar fiscal woes. Both include very high employee pay and benefits. Both have sought the protection of Chapter 9 municipal bankruptcy and are shielded by the courts from any new litigation. The court protection gives the cities time and fiscal space to negotiate with employees and creditors, and to organize their financial affairs. It’s hard to imagine the difficulty of running a city in bankruptcy with dwindling cash reserves.
Stockton and San Bernardino have taken very different approaches to how they will manage their cash reserves. Each approach will likely have big effects on how their bankruptcy processes play out.
Stockton has chosen not to challenge CalPERS, the statewide pension system, and has continued to pay the monthly pension contribution for its employees. The city’s unwillingness to ask CalPERS to negotiate has caused other Stockton creditors – the bond insurers – to challenge whether the city has met the conditions of a Chapter 9 bankruptcy. The blog Public Sector Inc describes the situation:
The city manager of Stockton, writing in the Wall Street Journal, has taken the same position as Calpers, namely that the city won’t seek to reduce pensions for employees through bankruptcy court. He’s being challenged, however, by other creditors in the case, who have argued before the bankruptcy judge that Stockton should be kicked out of Chapter 9 because it hasn’t made a meaningful attempt to reduce its pension debt.
San Bernardino, on the other hand, has stopped making pension contributions to CalPERS. Reuters reports: