Municipal Bankruptcy Update

Tomorrow, the City of Stockton, CA will go before a judge to prove that it is eligible for Chapter 9 bankruptcy protections. Lawyers believe that the City’s orderly approach to its original filing will allow it to successfully convince the judge to allow them to restructure under Chapter 9. Stockton has mainly targeted bondholders for cuts in its plan, which is being protested by bond insurers and is in stark contrast to San Bernardino’s efforts to restructure payments owed to CALPERs, the state pension system. CALPERs argues that Stockton’s obligations to them are not negotiable. Depending on whether or not promised pension benefits can be renegotiated will have significant precedence for municipalities facing financial difficulty. Meanwhile, in Michigan, the city of Detroit is facing a potential state takeover, which is a process not available for municipalities in California. If the Michigan does not take over the city and restructure its finances, there is a high probability that Detroit will have to file for Chapter 9 protection as well. In almost every case, rising pensions costs and poor fiscal management eroding reserve funds have led to the current dire circumstances for these cities and highlights the importance of analyzing pension and employee benefit liabilities that are not reported in the basic financial statements.