Bankrupt Stockton, California says has deals with key creditors


By Jim Christie

SAN FRANCISCO, Sept 27 (Reuters) - Stockton, California saidon Friday it had struck tentative deals opening the door tosettlements with two major creditors, and putting the city atthe "beginning of the end" of its bankruptcy case.

The deals also could avert a major court fight promised bythe creditors, bond insurers that led opposition to Stockton'sbankruptcy and who had threatened to drag the state pension fundCalpers into their fight with the city.

In a draft of its plan for exiting bankruptcy, Stockton saidit had the "outlines of a negotiated settlement" with bondinsurer Assured Guaranty over $124.3 million in outstandingpension obligation bonds the city had targeted for losses.

The draft plan also disclosed a preliminary deal with bondinsurer National Public Finance Guarantee over $45.1 million inoutstanding lease revenue bonds for the city's arena that hadbeen in dispute.

The draft plan provided no details on the potentialsettlement with Assured and a spokesman for the bond insurerdeclined to comment. The draft said Assured executive managementhad not yet reviewed the deal.

"As this document was being finalized, the City was innegotiations with this creditor and had developed the outlinesof a negotiated settlement," the draft said.

It also said a preliminary term sheet agreement had beenreached with National, along with agreements on other bondsinsured by it relating to parking garages and a city building.

National spokesman Kevin Brown confirmed the deal toReuters: "We're pleased to have reached a settlement agreementwith the City of Stockton that should expedite its exit frombankruptcy."

The draft said Stockton is near the "final chapter" ofbankruptcy, noting that "while we expect further intensenegotiations and court hearings, with perhaps a set back hereand there before this is over, this at least is the beginning ofthe end."

National and Assured led efforts by Stockton's so-calledcapital markets creditors to block the city's bankruptcy casefrom moving forward, and they had insisted city pensions managedby Calpers be treated like other debt the city wanted to impair.

The U.S. municipal bond market has been watching Stockton'sbankruptcy case closely for more than a year as the city inCalifornia's Central Valley had been aiming to force bondholdersto swallow losses while leaving pensions untouched.

Alabama's Jefferson County in its bankruptcy restructuringplan in June proposed losses for bondholders, becoming the firstlocal government to do so since the 1930s.

Pension costs are a growing concern for the $3.7 trillionmunicipal debt market and National and Assured contestedStockton's maintaining payments to Calpers, the CaliforniaPublic Employees' Retirement System.

U.S. Bankruptcy Judge Christopher Klein in April foundStockton eligible for bankruptcy protection and said theshowdown the insurers sought over payments to Calpers would haveto wait until the city filed its plan for adjusting its debt toexit from bankruptcy.

Calpers, had been sidelined in Stockton's bankruptcyproceedings but was ready to help defend its pension payments.

A spokeswoman for the $269 billion pension fund released astatement hinting at a truce with Stockton's capital marketcreditors. "We are hopeful this proposed plan of adjustment willallow Stockton to regain its footing and continue to provide theessential services to its citizens," the statement said.

Stockton's draft plan said the city would keep paying intoCalpers, noting it would "reform and reduce the costs of itspension program along with other post-employment benefits, butretain the basic Calpers pension which is crucial to the City'sability to recruit and retain a quality workforce."

Dale Ginter, a lawyer for Vallejo, California's, retiredemployees in that city's bankruptcy, said he sensed exhaustionon the part of Stockton's bond insurers: "People are probablytired. They've spent a lot of money on attorneys fees".

Ginter also believes the bond insurers saw they may bebetter off cutting deals than continuing to contest pensionpayments in court when city employees and retirees had given upso much in concessions to help the city fix its finances.

"The employees and the retirees are taking a very bigreduction in benefits," said Ginter after reading throughStockton's draft plan.

It projected Stockton's general fund through fiscal2049-2050 would save $659 million from pension reforms whileending medical benefits for retirees would save $812 millionover the same period.

The timing for a clash with Stockton over its plan foradjusting its debt to exit bankruptcy also would have beenproblematic for the bond insurers.

Stockton's city council recently put a measure to increasethe city's sales tax on the November ballot to in part help thecity exit bankruptcy following its austerity measures.

With revenue tumbling as its housing market crashed,Stockton cut $90 million in spending from 2008 through last yearto balance its budgets and slashed it work force. But early lastyear Stockton's city council rejected deeper cuts due toconcerns about public safety amid a spike in violent crime andit approved declaring bankruptcy.

Stockton's city council will take up the draft on Oct. 3 andthe city could file a final plan with Klein early next month.With about 300,000 residents, Stockton was the most populousU.S. city to file for bankruptcy until Detroit filed in July.

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