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Judge Rules Stockton Can Enter Bankruptcy

The city of Stockton, the largest U.S. city to ever file for bankruptcy, originally filed last June but creditors sought to prevent them from entering the protected status in court. After just three days of testimony a federal judge ruled against creditors and decided Stockton was eligible for bankruptcy protection.

During a mandated mediation period last year prior to filing for bankruptcy, Stockton reportedly offered creditors 17 to 18 cents on the dollar. Creditors argued that the city could have taken other steps to prevent the bankruptcy, such as raising taxes or cutting off payments to CalPERS. But in a move that seems to have hurt them, creditors also refused to pay their share of the mediation costs, leaving the city with the entire bill. In his decision today, Judge Christopher Klein accused the creditors of negotiating in bad faith.

The underlying driver of Stockton's insolvency is CalPERS, the state retirement system. The system is mired in corruption and is one of the main drivers forcing Stockton and other California cities toward bankruptcy. State pension costs have risen from "$611 million in 2001 to $3.5 billion in 2010" even as fund managers have made a series of poor investments and manipulated figures to cover up losses.

However state law says payments to Calpers are mandatory meaning Stockton can not reduce its payments to the system except in bankruptcy. Judge Klein did suggest that changes in the city's obligation to CalPERS could be part of bankruptcy proceedings. Lawyers for the city believe the legal action by creditors was aimed at improving their standing during the the bankruptcy phase of negotiations.


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