The Wages of Bankruptcy: Stockton’s Cautionary Tale for Detroit

More than a year after filing for Chapter 9 protection, the California city is struggling with protracted court battles and stripped city services — and that's exactly what the Motor City might be in for

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A pedestrian walks by a Stockton Record newspaper rack displaying the headline "Bankrupt!" on June 27, 2012 in Stockton.

At night, Stockton, Calif., becomes a ghost town. Streets lined with boarded-up buildings and rubbish-strewn parks are mostly empty except for drug dealers and their customers, says Dave Macedo, president of the local firefighters’ union. Even in daylight, shootings break out with regularity, and the city of 300,000 was ranked the 10th most dangerous in the country in 2012. “It’s the wild, wild West out there,” says Macedo. Or rather, the wild, bankrupt West.

When Detroit filed for Chapter 9 protection on July 18, it became the largest American city to ever declare bankruptcy. The progress of the city it replaced in the record books offers some clues about what Detroit will be facing in the coming months and years. Just over a year after seeking bankruptcy, Stockton is struggling with protracted court battles and stripped city services with little relief in sight.

After its June 2012 filing, Stockton’s first hurdle was proving itself eligible for the process: in order to be declared legally bankrupt, the city had to demonstrate to Judge Christopher Klein that it was insolvent and had attempted to negotiate its debts in good faith. City bankruptcy attorney Marc Levinson described the court battle as an unfortunate precursor to the real show. “We spent an awful lot of time, and an awful lot of money, just trying to stay in bankruptcy,” Levinson says. Finally, after nine months of eligibility battles and against creditors’ vehement objections, Judge Klein determined on April 1 that Stockton was insolvent. Winning the eligibility battle only set the stage for a larger war. The biggest chunk of Stockton’s debt is the $900 million owed to CalPERS, the California Public Employees’ Retirement System, a statewide pension service.

(MORE: Pittsburgh’s Lessons for Detroit)

But Wall Street creditors and unsecured private creditors also expect Stockton to fulfill its obligations to them, and they say it’s unfair for pensioners to get preferential treatment. Also at play is a conflict between federal and state law: while California requires Stockton to pay CalPERS, federal law allows it to renege on that obligation. Municipal bankruptcies are so rare — or at least used to be — that there’s no legal precedent for the jurisdictional fights, experts say. Any court decision released as Stockton and Detroit wind through the courts could play an important role in future proceedings.

Even while Stockton negotiates with its creditors, it continues to pay into the pension fund. But that doesn’t mean it hasn’t cut other services. So far, the city has trimmed pensioners’ health care and negotiated new contracts with city employees, such as police and firefighters, who had already faced a series of cuts before the filing. Senior centers, library programs and recreational services have all been axed.

The pension problem is not unique to Stockton — Vallejo, Calif., which exited bankruptcy in 2011 paying some creditors as little as 5¢ on the dollar, didn’t even try to challenge its obligation to CalPERS, likely because of the sky-high legal fees that would have come from lengthy court battles, says bankruptcy attorney Karol Denniston, who is representing a group of taxpayers in the Stockton bankruptcy. It’s not yet clear if Stockton will challenge its obligations to CalPERS when it files its final plan of adjustment this fall. But Stockton has defended its obligation to CalPERS by citing the importance of providing a pension plan to employees. Without a stable pension plan, Stockton might risk losing its dwindling police officers and firefighters, says Macedo.

(MORE: Motor City Meltdown: Long Road Ahead for Detroit’s Record Bankruptcy)

Now, as it continues to make its CalPERS payments, Vallejo remains in severe financial straits and unable to provide many public services. “Stockton doesn’t want to be another Vallejo,” Denniston says. Neither does Detroit.

Like California, Michigan’s constitution prohibits changes to pension benefits, which creates complex legal conflicts. On Thursday, just 20 minutes after Detroit filed for bankruptcy, Ingham County Circuit Court Judge Rosemarie Aquilina found the Chapter 9 filing to be unconstitutional on the grounds that it violated pension protections included in a state-constitution amendment. That ruling, along with other lawsuits seeking to stop the bankruptcy, was halted by a Michigan Court of Appeals on Tuesday in response to a motion filed by Attorney General Bill Schuette. And on Wednesday, the federal judge overseeing the bankruptcy also froze all state-court lawsuits against the city. But the battle of state constitution vs. federal law still looms.

The bankruptcy won’t just affect pensioners. In Stockton, staffing and budget cuts mean police and firefighters are leaving the city in search of jobs where the pay is higher and the town safer, says Macedo. Stockton’s 58 homicides in 2011 jumped to 71 in 2012 as police officers left the city in droves. And with city services on a shoestring budget, the fire stations occasionally experience truck shortages, and he says injuries among firefighters are on the rise.

In violence-ridden Detroit, police departments and fire stations have already endured reductions in staffing and equipment. Compared with the national average of an 11-minute wait time after calling the police, Detroiters wait an average of 58 minutes, according to a letter written by Governor Rick Snyder that authorized the bankruptcy filing. If Stockton’s bankruptcy is a guide, Detroit’s crime rate and derelict city services might only get worse.

Detroit has more than twice the population of Stockton, and its pension and health care liabilities comprise a hefty $9.2 billion of the city’s almost $20 billion debt. But one point in Detroit’s favor is the official steering the process: emergency manager Kevyn Orr, a restructuring expert who is not subject to the same political wheedling as Stockton’s city council. “Bankruptcy people live in this perverse world where we see everything happily, like, ‘Hey, great news, we only had to amputate two limbs and this person’s still alive,'” says University of Michigan law professor John Pottow. “Kevyn Orr will probably be more sanguine about making those decisions.”

No matter Orr’s skills, there’s no guarantee these fiscal amputations will be fast or safe for the people of Detroit. The city’s future is uncertain as the bankruptcy filing inches forward. And if Detroit’s anything like Stockton, it will be a very long time before this bankruptcy and its effects are in the Motor City’s rearview mirror.

MORE: Is Stockton the Start of a Rash of Municipal Bankruptcies?

82 comments
csmath30
csmath30

I also live in Stockton and the report is right-on-the-dot.  This city is garbage filled with an uneducated population living off public assistance.  My wife and I do not walk the streets of downtown at night, nor go out to dinner in this city.  We drive to Pleasanton or Sacramento for date night.  It is horrible and it is not getting any better.  The only reason I stick around is because my wife was raised in this town and has strong ties.  Stay away from this miserable, gang infested piece of garbage call city. 

p_ngo
p_ngo

I lived in Stockton for 3 years.  I had two random people try to pick fights with me.  I saw a purse snatch happen right in front of me.  I had two hit and runs on my car.  Car broken into 3 times.  I once went to eat and someone ripped my hat off my head for no reason.  I parked at my friends house once and his neighbor tried to shot me cuz he thought I was robbing him.  I drove down the wrong alley one night and there was a drug deal going on and I almost got killed.  Stockton sucks not just its bankrupt

JoeGor
JoeGor

We ought to force California, Illinois, New York, and similarly bankrupt STATES into bankruptcy, and start by eliminating ALL guarantees to ANYONE, especially to employees and unions, and require that no commitment save war be allowed to proceed one penny past what it is funded for.

jhngalt9
jhngalt9

When you run out of money then bankruptcy is the last resort. The writer acts as if there is another alternative.

JdReader
JdReader

There are some people ...mostly right wingers-- that are totally brainwashed.

JdReader
JdReader

Wall Street, unregulated greed at the World Center of Greed is to blame.

BobLittle
BobLittle

I just saw a video from a few years back where President Phony himself said that he had just saved Detroit from bankruptcy by bailing out GM.   And he had to break the constitution to do that to give shares from legitimate shareholders to his union cronies in return for their union dues.

thesafesurfer
thesafesurfer

Federal bankruptcy law trumps state law. It's called the supremacy clause of the constitution. FYI. 

thesafesurfer
thesafesurfer

According to news reports the city services in Detroit rank lowest of the top 50 cities in the nation already. Bankruptcy is the only way to restore city services to an acceptable level. Claire's argument doesn't improve city services in Detroit at  all. 

kari.mc
kari.mc

I understand the reputation of Stockton across the nation is, in most instances, deservedly negative. That being said, I cannot help but feel the reporter looked only for the points he needed to prove his story. I live in Stockton. I walk downtown. I leave the house after dark. Please, TIME, look perhaps for the whole story next time and help us rebuild our image, instead of further running us into the ground. 

YanceyWard
YanceyWard

Ultimately, given the unforgiving math of it all, it may make more sense to simply cut taxes to zero and disincorporate.  When you look at what is being done, the citizens of Stockton appear to be nothing more than money sources for the pensions of public employees.

JoePhillips
JoePhillips

Liberals have proven to be one of the very few Animals that cannot or will learn from experience. Socialism has failed repeatedly and always ENDS UP HURTING THE ONES THE LIBERALS PRETEND THEY ARE HELPING THE POOR. 

JoePhillips
JoePhillips

California the Golden state,  Obama and the Democrats model for American future, is fast becoming the poster child for an bankrupt third world State! 


An unholy alliance of Socialist Democrat politicians, Unions, Left wing loony,s  and Illegal Aliens supporters are feasting like hogs at the trough of tax payers paid benefits while taxing & regulating business and the tax paying public into poverty.

The corruption and pandering of Left Wing Democrat Politicians to their constituency of Unions, Illegal Aliens and open border supporters, are driving business and citizens to other states & countries, while leaving the parasites, welfare leeches and Hollywood perverts in an increasing bankrupt, crime ridden, dysfunctional state!

For years California has ignored economics 101 and imported Criminals, Uneducated fast breeding Parasites, and poverty from Mexico, which increased Medical, Welfare, Crime, Prison, etc. & adding a estimated 22 billion per year to Calif. State expense to support the invading horde of Illegal Aliens while exporting business and educated tax payers.

Like all Socialist countries the results have been a astronomical increase in social welfare, schooling, prison cost etc. and a lowing of Living standards, Heath care, Education standards, Tax receipts & finally Bankruptcy.

The policies of Comrade Obama and Wash. DC Democrats are intent on following Calif. policies and Pro-Illegal Aliens, Pro-Unions and Anti-tax paying citizens and are endorsing the same socialist process of rewarding the Corrupt, Stupid, Foolish, Lazy, Greedy & Criminal while punishing the responsible, honest, law abiding citizens of American.

Failure to abide by our Constitution against invasion & enforce our Immigration laws and constraints on wages and benefits for public employees will result in turning the Golden State into MexiCalif and the end of the Calif. Dream and the beginning of the MexiCalif. Nightmare!

Amnesty & Citizenship as a reward for their invasion of the USA, with chain immigration will result in the rest of the USA turned into a Spanish speaking third world cesspool and follow California into a polluted, over populated, Spanish speaking, third world Slum of Crime, Corruption, Poverty, Cruelly & Misery modeled on Mexico!

This will result in a population depending on Welfare and the Democrat party, thus assuring the lock on power for the Socialist Democrat party of the United States of Mexico!

PeterAshley
PeterAshley

There is a real role for Detroit to play here.   Unfortunately its as a house of horrors for what happens when politicos let the popular will run amoke with out considering the consequences, driving out the tax base.

PaulFrantizek
PaulFrantizek

There was a window of opportunity where the city could have been salvaged - note that I avoided the word 'saved' - but Jennifer Granholm squandered that, instead choosing to prop up her Wayne County cronies.

The shocking thing about Detroit is the property tax collection rates, being less than 50% according to some accounts.  Which means, once you look deeper and sort for the better neighborhoods, huge areas of the city see maybe 25% of the properties actually paying their tax.  The city has the tax base of a city of perhaps 300,000 while it attempts to support the overhead of a city of +1,000,000.  Crazy...

The smartest play now would be be to reincorporate the downtown/WSU/hospital district into a truncated new Detroit while allowing the few viable - read: places where property taxes are actually paid - neighborhoods to reincorporate as smaller cities.  The rest can go on as unincorporated Wayne County, receiving a greatly reduced level of services as befits their horrendous tax payment rates.


Sadly, the whole mess is going to end up being bailed out yet again, the GM/Chrysler Bail Out representing the first attempt.


AlgernonMoncrief
AlgernonMoncrief

DETROIT HAS A $ MULTI-BILLION COLLECTION OF ART THAT CAN BE SOLD . . . THE CITY CAN AFFORD TO PAY ITS DEBTS.

Detroit owns 60,000 works of art valued in the BILLIONS, the city can afford to pay its debts. I am certain that Sothebys could liquidate this collection quite readily over the next two years, freeing up billions to meet municipal debt obligations.Detroit's unfunded pension liabilities are just $2 to 3 billion of its $18 billion total municipal liabilities.

Public pension benefits are part of a worker's earnings (deferred pension compensation.)  Bonds are investments. The possibility of default is assumed by an investor in bonds, and the investor is compensated through the receipt of interest (coupon payments on the bonds.) These are two very different things. The Contract Clause of the U.S. Constitution requires payment of earned employee compensation when the employee has performed under the contract.

"'They basically let us know that the collection was not off the table,' said museum director Graham Beal."

"Nowling conceded that while the city has not made any plans to sell assets, 'it is possible that the city's creditors could demand the city use its assets to settle its debts.' Beal maintains that DIA's collection is among the top six in the Western Hemisphere. While he could not specify a value, Beal said it would likely be in the billions of dollars."

"Laura Bartell, a  bankruptcy law professor at Wayne State University in Detroit, said she believes Orr is just doing his job and that it would be irresponsible for him not to consider what assets Detroit has and what they are worth. 'I don't think anyone argues that Detroit does not have the legal authority to sell something that Detroit owns. It's a question of whether Detroit will -- and if Detroit should,' said Bartell." 

"Gov. Snyder has been working with Orr to try to ward off the city's bankruptcy and the sale of the DIA's art. However, Snyder admitted that he is not legally empowered to declare the collection hands-off."

http://www.cnn.com/2013/05/31/us/michigan-detroit-art

DIA Museum Counsel:

"'Chapter 9 of the federal bankruptcy code is different than most people realize. Under Chapter 9, state law cannot be overriden,' Pirich said."

http://www.freep.com/article/20130604/NEWS06/306040086/dia-artwork-senate-museum-detroit

(My comment: Of course, the Michigan State Constitution, state law I presume, deems public pension contractual rights inviolate.)

"There's not a lot of previous case law that tells us what's going to happen here," said Paul Secunda, a Marquette University law professor who specializes in labor and benefits issues.

"It's not just an issue of bankruptcy law and pension law, it's also an issue of federalism," Secunda said. "Can a federal bankruptcy court basically ignore a state constitutional provision and allow a city like Detroit to ignore its previous promises concerning public employee pensions?"

"It's essentially similar to salary - you just don't reach inside somebody's savings account and take their pay back, nor should you reach inside their pension and deny them their pension benefits," said Steve Kreisberg, director of collective bargaining and pensions for the American Federation of State, County and Municipal Employees.

http://m.apnews.mobi/ap/db_6776/contentdetail.htm?contentguid=ujtMI3hk

"If the city declares bankruptcy, the state-appointed emergency manager, Kevyn Orr, can sell off its assets to repay creditors—and artworks housed in the 128-year-old museum are not exempt. The city’s debt about equals the worth of the museum’s holdings."

"Senate Majority Leader Randy Richardville recently introduced a bill that would protect the museum’s collection from being sold off during bankruptcy proceedings.  Even if that legislation passes, it may not help the museum: Federal bankruptcy laws tend to trump state laws in
court."

http://www.businessweek.com/articles/2013-06-04/in-bankruptcy-detroit-could-sell-off-its-art-collection

"A Metro Detroit bankruptcy expert already has indicated Schuette’s opinion may be for naught.

'Federal law trumps state law' in a Chapter 9 municipal bankruptcy, said Douglas Bernstein, a bankruptcy attorney at the Plunkett Cooney law firm in Bloomfield Hills, so DIA art would not be protected from sale to satisfy creditors."

http://www.detroitnews.com/article/20130613/METRO01/306130115

Earned, accrued, contracted public pension benefits (deferred compensation for work performed over decades) are also “treasured assets,” property protected by the Takings Clause. Works of art are relatively liquid assets of the city, and may very well be used to meet municipal debt obligations. The art could be sold to other public institutions where it would continue to be available to the public. Even if the art were to be sold to private individuals, much of it will eventually return to public institutions in coming decades.

Detroit's pensioners should not to forced to surrender contracted benefits earned over a lifetime in order that elite Detroit art lovers may more easily engage in their hobby.

Support public pension contractual rights and the rule of law in the USA.  Contribute at saveperacola.com, Friend Save Pera Cola on Facebook!

BillStokes77
BillStokes77

Yes these employees did work for years and did contribute to their pension and health care plans. But in almost every case they did not contribute nearly enough to properly fund either plan. Why? Because politicians when they bargain with other folks money almost always give into the unions in exchange for votes. It is always easy to spend other peoples money, but at the end of the day you always eventually run out of other peoples money. That's whats happened. No matter what you have promised you can't pay if you have no money. By the way those bond holders may have done it for money but they put real money into these cities which was often used to pay folks when there were budget shortfalls. Everyone needs to share in the pain.

Obama_dogeater
Obama_dogeater

I seem to remember Romney being mauled by Obozo and the press when he suggested letting Detroit go bankrupt so that an orderly restructuring could take place. Obozo said he saved Detroit, remember, libs?

HughShakeshaft
HughShakeshaft

Here's how it will go now that they did not challenge CalPERS:  1.  The city won't be able to get municipal loans because they defaulted.  2. All revenue will have to come from taxpayers to to pay for services and the pensions.  3.  As services decrease and become worse, taxpaying residents will flee (Deomcrats are welcome to remain and support the system they so deeply believe in).  4.  As residents move away, property values will drop, and the burden will be spread out on fewer backs.  5.  The city won't have enough revenue to pay CalPERS even with no services at all.  6.  This is not a war between parties, it's a war between generations.  Our grandparents are enslaving our children. 

HallKyle
HallKyle

" [ * * * ] The pension problem is not unique to Stockton — Vallejo, Calif., { * * * ] didn’t even try to challenge its obligation to CalPERS, likely because of the sky-high legal fees that would have come from lengthy court battles, [ * * * ]

Now, as it continues to make its CalPERS payments, Vallejo remains in severe financial straits and unable to provide many public services. “Stockton doesn’t want to be another Vallejo,” Denniston says. Neither does Detroit. [ * * * ]

-   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -

So, the retired public union workers still get their pensions no matter what, if the above is correct (i.e., bankrupt cities still pay their pension obligations, even if it means cutting every other municipal "service" to zero).

In the end, then, as far as leftist Democrats are concerned, municipal bankruptcies within the U.S. aren't much of a problem.       So all is good. 

CliffordSpencer
CliffordSpencer

Remember when Rush Limbaugh was sponsored by GM?

   Who actually BUILT the cars?

  Can the REAL workers sue him to get their money back?

Plantiful
Plantiful

Employees of Detroit performed essential services for the city, for whatever became of it.  They worked for the city, putting money into their pensions with a guarantee of pension income when they retired. The majority planned their retirement income (a whole $20k/year on average) on this money, and without any income from Social inSecurity, this was their income plan.


Investors, on the other hand, purchased Detroit's municipal bonds, to make money as an investment.  Investments carry a level of risk.  Unfortunately, for these investors, they should be the first to lose their money in this POOR INVESTMENT.  Investment carry risk, and that's a fact in the financial world.  Too bad the court's, in this country of Wall Street will likely not see it this way.  This is how riots start.

SPITFIRE
SPITFIRE

They brought it on themselves...................YOU REAP WHAT YOU SOW........

kidcat42
kidcat42

239,600 manufacturing jobs lost in Texas

43,800 manufacturing jobs lost in Alabama

15,200 manufacturing jobs lost in Louisiana 

87,300 manufacturing jobs lost in Georgia

And the list goes on. Why did the republicans vote NO twice to End the tax breaks for shipping our jobs out of the country? Why do republicans want to continue to reward companies that leave?

kidcat42
kidcat42

When Romney said "Let Detroit Go Bankrupt" He literally meant it. The vultures are circling.  

caseumissedit
caseumissedit

@JoeGorYeah, great idea, take away something that public employees paid for with lower wages while working so they can pay back bankers who duped them with interest rate swaps and derivatives.

jdahunt
jdahunt

@JdReader your uninformed comments are sooo laughable.....hey loony..did you forget that your savior Obama set a record in the amount of campaign contributions from wall street....you didn't know that...really.

JdReader
JdReader

@JoePhillips The American economy is socialism...the trillions the government spends to prop up corporations with their purchases.

PaulFrantizek
PaulFrantizek

@JoePhillips The United States of Mexico comment is interesting.  I've been saying for quite some time that the Democratic Party's goal is to turn themselves into the American equivalent to the PRI.

ptcruiser5850
ptcruiser5850

@CliffordSpencer Did the real workers receive real wages, negotiated in an UAW contract?  GM spent money on advertising, necessary to sell the sorry crap assembled by UAW labor.

JeffreyHoover
JeffreyHoover

@Plantiful

"Employees of Detroit performed essential services for the city"  

and the city became a sh*thole, some service

"They worked for the city, putting money into their pensions with a guarantee of pension income when they retired"

The Pension Plan of the General Retirement System of the City of Detroit is a defined benefit pension plan and defined contribution plan.

The City of Detroit (employer) makes regular contributions to the Plan. The required contributions are determined by the Plan’s actuaries using the entry age normal cost method. Basic pension and disability benefits are funded through employer contributions plus investment earnings on those contributions.

Active employees may voluntarily contribute 0 percent, 3 percent, 5 percent, or 7 percent of gross pay to the Plan. Employee contributions are maintained in separate accounts solely for the benefit of the contributing employee.

HughShakeshaft
HughShakeshaft

@Plantiful They elected to pursue their own pension plan over Social Security.  Their union democratically chose that.  No one forced them to avoid social security.  

As for making bondholders eat it, go ahead, but it won't solve your problems.  It means you just decided not to get bonds for reasonable rates.  

benjaminbaby
benjaminbaby

@kidcat42 this country has the highest corporate tax rate in the world, don't you think that might have something to do with the problem?

PatLoudoun
PatLoudoun

@kidcat42 Would that be "President" Romney?

Is there any leftist crap you won't fall for? Tax breaks? Jeez.


JoeGor
JoeGor

@HazeAndDrizzle @JoeGor (1) WAR is not MURDER (2) War, justice, and a currency are the only state services benefiting the population in general and probably should BE the only state services at a national level. (3) Defense is simply more important and prior to any other consideration. (4) There is no such thing as a social contract. There is however a Constitution.

swagger
swagger

@benjaminbaby @kidcat42 that's hilarious.  corporations, like rich individuals, take advantage of loopholes in the tax laws to pay much less than the corporate taxes you mention.  how is it that GE has paid zero tax and other giants like exxon actually claim a tax refund or credit by slick accounting and offshoring their loot?

AnthonyMcMillan
AnthonyMcMillan

@PatLoudoun @kidcat42 I'm sorry, are working under the delusion that the President has been able to do anything through the Congress in the last six years? Is there any right wing crap you wont sop up on Fox News there?

professorphil
professorphil

@swagger @benjaminbaby @kidcat42 That's exactly the problem.  While we have very high corporate tax rates, the well-connected get large breaks and pay substantially less and in some cases zero in taxes.  The solution is to lower the rates to be competitive with other free market economies, and eliminate ALL of the special carve-outs the corrupt politicians sold to rent seekers for campaign contributions and cronyism payback.

PatLoudoun
PatLoudoun

@AnthonyMcMillan @PatLoudoun @kidcat42 It's pretty much impossible to take you seriously when you are incapable of remembering 2009 and 2010.

I suggest you start watching Special Report with Bret Baer, 6 PM eastern on the Fox News Channel. What you're doing currently isn't working.

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