Why Stockton bankruptcy could cost you your retirement

A judge has cleared the way for Stockton to proceed with Chapter 9 bankruptcy hearings despite challenges that the city should do more to raise revenues. Stockton owes nearly $1 billion to the state retirement program. The outcome of the case could set a precedent that may reverberate nationwide.

STOCKTON, CA (Catholic Online) - The largest city in the nation to ever declare bankruptcy is moving forward with plans following Monday's ruling by a judge that said city can go ahead and declare Chapter 9. The case will resolve who gets paid first from limited city funds - retirees or creditors.

During heady and cash-rich days, Stockton, along with many other major cities across the nation, attracted a talented workforce with the promise of very generous retirement pensions. However, those pensions have become the city's single biggest liability. Stockton owes about $900 million to the California Public Employees Retirement System (CalPERS).

Payments to the system have continued, but the city owes more than it can pay. The nearly $1 billion in pension debt is the single largest liability the city owes and it has done much to bankrupt the coffers. 

The cash-strapped city has already cut public services including police forces as much as they can. Police, for example, now only respond to emergencies in progress. Crime has spiked.

The city's proposal now involves reducing some of the current pensions without touching those previously negotiated. However, attorneys for some creditors argue this is unfair and that all pension plans should be cut, not just new ones.

California law says Stockton must pay the pensions, however bankruptcy court could allow the city to restructure the debt, effectively getting out of having to pay some of the pensions. This may conflict with California's state rights as outlined under the 10th Amendment. So which is more powerful, the 10th Amendment or federal bankruptcy law?

That question remains to be answered.

Following Stockton, several cities have declared bankruptcy and if Stockton emerges victorious in court, it could inspire other cities to do the same, as a means of avoiding obligations that have become too burdensome to keep.

At the same time, if cities cans imply write off debt they accrued by making generous deals during good times, then there may be little to discourage them from making more promises to the next generation of workers -- promises they might not be able to keep.

For now, it is impossible to predict the outcome, but the entire nation is watching Stockton to see what will happen next. What happens to Stockton might just happen across the nation.

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