A judge on Thursday approved a debt plan by Stockton, California, one of the largest U.S. cities to declare bankruptcy, allowing it to reorganize more than $900 million in long-term debt and put more than two years of financial uncertainty behind it.
Marking a critical development in the city’s financial recovery, U.S. Bankruptcy Judge Christopher Klein said Stockton can use the plan to exit the court’s Chapter 9 protection, which it sought in 2012. Klein’s ruling can be appealed.
“This plan, I’m persuaded, is the best that can be done in terms of restructuring an adjustment of the debts of the city of Stockton,” he said.
The city negotiated deals with all major creditors except Franklin Templeton Investments, which argued it was being treated unfairly. The investment firm said the city isn’t touching a massive employee pension fund but is asking the company to walk away from collecting nearly $32.5 million still owed.
“Obviously, we are disappointed,” Franklin Templeton’s attorney, James Johnston, told the judge. “We will evaluate our next steps.”
Klein ruled earlier this month that bankruptcy law allows the city to treat pension obligations like any other debt, meaning the city could trim benefits.
An inland port city 80 miles east of San Francisco, Stockton filed for Chapter 9 protection in 2012, making it the nation’s largest bankrupt city before Detroit filed for bankruptcy last year.
Elsewhere in California, Vallejo went through bankruptcy before Stockton. San Bernardino filed shortly after Stockton and has yet to present an exit plan.
Stockton’s leaders say the city fell victim to an unforgiving boom-and-bust economic cycle.
Before the recession, leaders spent millions of dollars revitalizing the downtown area with a new City Hall and building a marina, sports arena and ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.
With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn’t pay its bills. The city slashed millions of dollars from its budget and laid off 25 percent of its police officers. Crime soared.
Franklin Templeton also argued that Stockton agreed to better terms with its other creditors, and that the city’s economic projections showed it could afford to eventually pay back most or all it owed Franklin Templeton.