Chapter 9

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One chapter of the Bankruptcy Code that up until the last few years had not gotten much use is Chapter 9.  It is the chapter under which municipalities such as cities and counties file for bankruptcy protection.

On October 13th, 2011, I wrote a post predicting that a wave of municipal bankruptcies would start breaking on our shores.  On August 15th, 2012,  I discussed several municipal bankruptcies that had just been filed.  One of those bankruptcies, the Stockton, California, one has just been in the news because of a dispute over whether Stockton could reduce its payments to CalPERS, the retirement plan for California public employees.

Here’s an excerpt from the L.A. Times article written by Chris Megerian, Melody Petersen, and Dean Starkman, describing the ruling by the bankruptcy judge, Christopher Klein:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.  U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.  “I’ve concluded the pension could be adjusted,” Klein said.

What does that mean for California public employees who work for a municipality that files for Chapter 9 protection?  Quite simply it means that the Rolls Royce retirement plan might end up as more of a Yugo plan.
Continue Reading What Happens To Pensions In A Chapter 9 Bankruptcy?

Way back on October 13, 2011 I wrote about the coming wave of city bankruptcies.  I quoted several sources which predicted municipal defaults on a large scale.  If you’ve been keeping up with the news you know that the wave is starting to crest.

I.          Recent California City Bankruptcies

In just the last few weeks several California cities have filed for Chapter 9 bankruptcy protection, and many more are close to filing.

A.        Stockton

According to the June 28, 2012 issue of Reuters:

Stockton, California, became the largest city to file for bankruptcy in U.S. history on Thursday after years of fiscal mismanagement and a housing market crash left it unable to pay its workers, pensioners and bondholders.

And all over Stockton you can hear the cheering:  “We’re number one, we’re number one” because they’re the largest governmental entity to file for bankruptcy.  Whoops, not so fast Stockton.  Later in the article we read:

Stockton becomes the nation’s most populous city to file for Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the biggest municipal bankruptcy in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011.  Stockton has about $700 million in bond debt.

How do you like that?  What a disappointment!  Beaten by a county in Alabama!  That’s gotta hurt.  I mention the Jefferson County bankruptcy because when I wrote my October 13, 2011 post, I stated that they had only defaulted on their municipal bond obligations, and had not yet filed.  But they came through with a subsequent bankruptcy filing.

By the way, if you read that October 13, 2011 post I hope you heeded my warning and divested yourself of any investments you may have had in municipal bonds.  As the wave of municipal bankruptcies continues, those instruments are going to drop in value pretty quickly.  Some of them already have junk bond status.
Continue Reading Hot Time: Bankruptcy For The City