Retired Employees of Stockton Sue the City of Stockton in their Chapter 9 Bankruptcy

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On July 10, 2012, the Association of Retired Employees of the City of Stockton filed an adversary complaint suing the City of Stockton in their Chapter 9 bankruptcy case for impairment of contract under the United States Constitution, impairment of contract under the California Constitution, denial of due process, breach of contract, promissory estoppel and declaratory relief.

The retired employees of Stockton hired bankruptcy attorneys to sue Stockton because they believe most of them were promised as part of their compensation package the payment of health insurance premiums during retirement.  As part of bankruptcy Stockton plans to stop payment of health insurance premiums for many of the retired employees.  There are approximately 500 retired employees.  The retired employees are requesting a temporary restraining order to stop Stockton from eliminating payments for their health insurance premiums.  The lawsuit alleges that if the payment of the health insurance premiums is stopped it could endanger the lives of the elderly and ill retirees.

According to court records Stockton started paying the entire health insurance premium for police officers around 1980, then to more of their retired employees as the 1980’s continued, and by 1991 Stockton paid for all retired employees, plus one dependent or spouse’s, health insurance premiums until age 65.  The lawsuit alleges that many of Stockton’s unions made wage concessions to maintain the benefits.  It would appear that these city employees still received pay increases as high as 4% per year or between 2.5% and not to exceed 6% per year.  I know many employees at private companies would be more than happy with a wage increase of 4% per year each year in the real world.  Most private employers make employees pay for all or most of health insurance premiums these days too.  Most employees of private employers rarely see pay increases each year at a set percentage too.

All that aside, when Stockton consulted bankruptcy lawyers and filed bankruptcy they announced they would stop making health insurance premium payments for all retirees who had been employed with the city for less than ten years and provide a lesser stipend to the long term retirees.  They also announced that all health insurance premiums would no longer be paid in their entirety as of July 1, 2013.

This situation is really unfortunate no matter what the outcome is.  The Bankruptcy Court will ultimately make a choice that truly could greatly affect the health and welfare of the retired employees of Stockton.  At the same time it will set a precedent for future municipal bankruptcy cases regarding the treatment of deferred compensation and retirement benefits.  Stockton needs to become financially viable again by cutting costs.  Retired employees and other creditors were unwilling to make deep enough cuts outside of bankruptcy, so now they find themselves at the expensive process of dealing with it in bankruptcy court.