The Bond Buyer has an interesting article where it discusses comments in a speech by California State Treasurer Lockyer. Lockyer predicted that if U.S. Bankruptcy Judge Klien’s oral ruling concerning pension obligations in the Stockton California bankruptcy case stands, the California State Legislature may consider legislation to preclude California municipalities from filing Chapter 9 bankruptcy.
State laws define when a municipality may seek Chapter 9 bankruptcy (“open the door”), but Federal law defines what happens during the bankruptcy (“after the municipality goes through the door”). If a bankruptcy judge reduces the pension liabilities of one municipality, without changing the pension commitments to participants, results in increased financial burden on all other municipalities or the state. This would call into question the “fair and equitable” standard of Chapter 9 bankruptcy.
