Dan Walters

By Dan Walters
Published: Sunday, Jun. 17, 2012 – 12:00 am | Page 3A

As votes in California’s primary were being counted on June 5, Stockton’s City Council was giving its city manager permission to file for bankruptcy protection if negotiations with creditors failed to bear fruit.

The vote-counting quickly revealed that voters in San Jose and San Diego had overwhelmingly approved landmark reforms in pensions for city employees. Almost immediately, city worker unions filed suit to block the reforms.

They and other public employee unions are also pressing the Legislature to revise a newly enacted state law to make it more difficult for local governments to seek bankruptcy protection, fearing that a federal bankruptcy judge could set aside union contracts and perhaps even modify pensions.

Meanwhile, Gov. Jerry Brown wants changes in retirement benefits for state workers, warning lawmakers that without them, public backlash, as evinced in San Diego and San Jose, could doom voter approval of new taxes.

However, Democratic legislators are utterly dependent on public employee workers for campaign sustenance and are clearly leery about serious pension changes.

Chances are very high that Stockton will file for bankruptcy protection sometime this month, which would be the largest municipal bankruptcy filing in American history.

Rising pension and health care costs are big components of Stockton’s insolvency, but so are many millions of dollars in bonds that the city floated in recent years to finance lavish new recreational and civic facilities, including a sports arena, a baseball park, a marina and a new city hall.

The city’s unions have resisted contract modifications, and the city manager is negotiating with bondholders, trying to persuade them to write down their loans. But there appears to be serious reluctance among bankers, because a Europe-like forgiveness could threaten the entire municipal bond market.

If bankruptcy ensues, the creditors and other stakeholders would line up before the bankruptcy judge, pleading their cases. Would the banks insist that retirement benefits be on the table for haircuts as well as bonds?

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