Hazy With Threat of Avalanche: Bankrupt Stockton Is Inching Toward Confirmation

Judge Christopher Klein held a hearing in the municipal Chapter 9 bankruptcy of Stockton, California on Tuesday. Stockton and all its creditors but one have agreed on a plan of adjustment. Go here to read why that that one, Franklin Bond Funds, was mighty unhappy. Franklin's most straightforward objection to its treatment was that the city planned to pay it only $150,000 for the value of the golf course on which Franklin had the equivalent of a mortgage. That's all it's worth, claimed the city. On the other hand, Franklin's appraiser opined that the value of the golf course was upwards of $7 million. (If you want to learn more about how appraisers value income-producing property read a short account from a year ago of my interview of the authors of A Practical Guide to Bankruptcy Valuation here. If you're really interested you can listen to the podcast of my interview with them, a link to which is embedded in my post--but only if you're a member of the American Bankruptcy Institute.)

Where was I? Oh yes, the value of the golf course. According to Judge Klein the golf course is worth $4 million, which is what Stockton will need to pay Franklin either in a lump sum or over time with interest. (I know this because I followed the live tweeting from the hearing by Roger Phillips @rphillipsblog ). This is a bump in the road but hardly fatal of the feasibility of Stockton's plan. (For more about the peculiar Chapter 9 notion of feasibility download my article Who Bears the Cost? The Necessity of Taxpayer Participation in Chapter 9 by going here or simply read my earlier blog post here.)

Of greater significance to Stockton, Detroit, and beyond were Judge Klein's comments about the behemoth California Public Employees Retirement System (CalPERS). For my most recent post explaining the stranglehold CalPERS has on cities in California go here. Judge Klein let it be known that he isn't so sure CalPERS has the power it believes it has. For a summary of the judge's remarks check out Ed Mendel's blog here.

Even though it's clear the judge would be willing to cut CalPERS down to size, I think it's unlikely Stockton will take him up on the challenge. Stockton simply doesn't have the gumption to take on a mammoth public pension fund with virtually unlimited financial resources. Of course, the fact that Stockton's city government are wimps doesn't preclude the judge from refusing to confirm the plan. Perhaps he's read my article Municipal Bankruptcy: When Doing Less is Doing Best (download here) in which I strongly advocate that the court refuse to confirm a plan that "discriminates unfairly" unless all parties agree. I had assumed that there would be at least one nonconsenting party to carry the fight. In Stockton, perhaps Franklin will take up the court's invitation. If it does--and prevails--the ramifications for cities in financial distress will be enormous.