The chapter 9 case unfolding in Stockton, Calif. is reminding investors of the Obama Administration bail out the United Auto Workers in Chrysler's bankruptcy as the city of Stockton is subordinating its bond debt to worker pensions, according to a Wall Street Journal editorial today. The San Joaquin Valley's second largest city filed for chapter 9 bankruptcy this summer after a three-month mediation with creditors and unions ended in stalemate. Bond insurers that guarantee about $200 million in debt would not submit to a haircut unless the rich pensions that helped drive the city to bankruptcy were also clipped, according to the editorial, but unions would not countenance an even modest reduction to their pensions. Over the last two decades the city sweetened benefits and pay such that the average firefighter's total compensation is more than three times the city's median household income. Public safety officers can retire at age 50 with pensions equal to 90 percent of their highest salary, and until this year free lifetime health benefits. These benefits were not sustainable even in good times. In 2007 the city had to borrow $127 million to pay a delinquent pension bill.
To learn more about issues related to municipal financial distress and chapter 9 bankruptcy, be sure to pre-order the latest ABI publication, Municipalities in Peril: The ABI Guide to Chapter 9, Second Edition, now in ABI's Bookstore.