The California city of Stockton became for a time the largest U.S. municipality to go bankrupt when it filed for Chapter 9 protection in June 2012. The citys top creditor is the $265 billion, Sacramento-based California Public Employees Retirement System. Stockton filed with the expectation that CalPERS would get all of the $30 million owed to the fund annually and that the city would keep paying state retirement benefits. Thats what happened with Vallejo, California previously, the biggest U.S. city to declare bankruptcy. Stocktons bondholders and capital market creditors objected to the plan, though. At an April 1 hearing, Chief Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California raised the possibility that the court might not rubber-stamp the payment of pension obligations to CalPERS. Klein, 67, who holds an MBA and a JD from the University of Chicago, showed a willingness to confront one of the main questions in municipal bankruptcies: Can the courts undo pension promises? Although the judge said it wasnt the time to tackle such matters, he warned that this does not mean theres not potentially a serious issue involving CalPERS. In early October, Stockton agreed on a road map that would see it continue its payments to CalPERS in full and make other creditors whole.
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