Just days after Stockton became the third California city to declare bankruptcy; they are facing a challenge from bond insurer MBIA Inc.
In a court filing MBIA, said that their bankruptcy is invalid since they failed to seek concessions from the city’s largest creditor the California Public Employees Retirement System. They claim city leaders had not negotiated in good faith with union and also stated the bankruptcy plan was doomed because it did not address their biggest problem, employee pensions.
Stockton made history when they became the largest city ever to declare Chapter 9 bankruptcy. High foreclosure rates have been a drag on the city’s revenue while building projects and employee pension plans have drained their resources.
A bankruptcy judge must give their approval before Stockton can enter a debt-relief plan. The main thing a judge will look at is if the city made an effort to avoid bankruptcy before giving their approval.
Calpers has used court challenges in the past to dissuade cities from filing for bankruptcy. “It’s the equivalent to a declaration of war,” said San Francisco attorney Karol Denniston, speaking to CNBC, “It (pensions) affects every municipality looking to restructure.”
Retiree benefits are strangling any California cities and San Bernardino may be the next large municipality to enter bankruptcy.
Bankruptcy is often the only alternative for businesses, individuals, or cities that are drowning in debt. Bankruptcy attorneys work diligently to make sure the entities they represent are able to present a realistic plan that allows them to become financially solvent.