No more turning a blind eye

The federal judge shepherding Stockton's bankruptcy is worried about Vallejo ... and that means Judge Christopher Klein is worried about Stockton.
Vallejo emerged from bankruptcy three years ago but is again circling the drain, being sucked down by its pension obligations. That Bay Area city decided against touching its employee pension obligation when it initially sought bankruptcy protection. That decision, while avoiding a fight with employee unions and the state's giant pension system, CalPERS, kept staggering financial obligations on Vallejo's books.
A similar tactic was taken by Stockton: no confrontation with CalPERS. The theory, and it certainly seemed reasonable at the time, was that to take on CalPERS was to invite an expensive, protracted court fight the city might lose. City leaders reasoned they hand their hands full fighting creditors over the hundreds of millions owed them.
Stockton's creditors, of course, didn't view it that way. They felt they were being singled out to take the hit while city workers jobs and worker pensions were being protected (never mind that the ranks of the two biggest city departments, police and fire, were drastically thinned as the city plunged toward bankruptcy and we had a surge in murders as one consequence).
At a hearing this week in Sacramento, Klein took note of news reports about Vallejo's increasingly precarious position.
"This court," he said, "has an independent duty to satisfy itself that the (Stockton) plan is going to work. "I'm probably going to have to be persuaded that the plan is going to work."
A month ago Moody's Investors Service warned that the city could face a second bankruptcy if its pension obligations aren't reduced.
Of course, it was outfits like Moody's that helped steer the country into the Great Recession -- and by extension Stockton into bankruptcy -- when the credit rating companies essentially turned a blind eye toward the Wall Street shenanigans that caused the economy to fail. Actually, blind eye is too kind since the rating agencies were handing out gold stars to every shaky investment package Wall Street cobbled together.
Moody's part in this was not lost on Marc Levinson, Stockton's bankruptcy attorney, and he made sure it wasn't lost on Klein either.
"What you're reading in the press is not true," Levinson told the judge. "Look where the press is coming from. It's coming from the tools of Wall Street."
The credit rating companies do have a certain credibility problem.
Still, Klein is right in fretting about Stockton's long-term pension obligations and what they might mean to the city's financial health after bankruptcy. Nobody in city government years ago seemed to give much thought to those obligations as they were granting the benefits. It's time someone did.