We thought it would be useful to comment on the city’s financial plight in the wake of the recent bankruptcy.
-James Dearborn, senior rates strategist, Columbia Management
Although we have no exposure to Stockton, California debt, we thought it would be useful to comment on the city’s financial plight in the wake of the recent bankruptcy court ruling allowing the city to file a “plan of adjustment” or the equivalent of Chapter 11 reorganization. We, and other municipal bond participants, will be watching this process closely to see how the court treats various creditors. Of particular interest will be the treatment of obligations owed to the California Public Employees Retirement System (CalPERS). Given the large size and budgetary importance of Stockton’s CalPERS payments, the court’s ruling could have widespread ramifications for other distressed municipalities in California and elsewhere across the country. The resolution of whether or not federal bankruptcy law trumps state law (which protects pension payments to CalPERS) may influence the expected level of recovery in any other bankruptcy case. However, we do not believe that Stockton’s bankruptcy or future rulings in this case, will, in and of themselves, cause a wave of bankruptcy filings in California or elsewhere. While Stockton’s financial and economic plight is not entirely unique in California — there are several other very distressed cities in California — we believe the number of bankruptcies will remain relatively small and not significant in the context of the overall municipal bond market.