On April 1 Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California ruled that the city of Stockton is eligible for relief under Chapter 9 of the U.S. Bankruptcy Code, rejecting challenges by "Capital Markets Creditors" that insured hundreds of millions of dollars in bonds issued by the city. The bankruptcy case, the largest ever by a U.S. city, was initiated in June 2012 in the face of Stockton’s $26 million budget deficit, even after the city of 300,000 slashed spending by $90 million over three years, drastically cutting pay for police officers, firefighters and other public employees, and cutting public services.

The next step in the bankruptcy case is Stockton’s preparation of a proposed "plan of adjustment" to restructure more than $1 billion owed to creditors. This is anticipated to raise unprecedented issues in municipal bankruptcy, including Stockton’s efforts to slash payments on its bond debt of about $300 million, as well as possible reductions in its $900 million liability to the California Public Employees’ Retirement System (CalPERS), the city’s largest creditor. These issues involve uncharted waters, and if Stockton is able to cut these debts, it will likely embolden other cities facing comparable daunting liabilities to consider a bankruptcy filing.

Potential Reduction In Stockton’s Bond Debt

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