Stockton, Calif. city council backs plan to exit bankruptcy

Reuters

By Jim Christie

STOCKTON, Calif., Oct 3 (Reuters) - Stockton, California'scity council approved a plan on Thursday for the city to adjustits debt to exit from bankruptcy after reaching a deal with bondinsurer Assured Guaranty to restructure more than $150 millionof outstanding debt.

The deal marks the end of a long and often bitter fightbetween Stockton and its biggest bond insurers since the cityfiled for bankruptcy last year and stunned the U.S. municipaldebt market with threats of forcing losses on bondholders whileleaving pension payments intact.

"Now we have deals with every bond insurer that's involvedin the bankruptcy process," Stockton City Manager Bob Deis said,adding he is hopeful the city is on track to exit bankruptcy inabout six months.

"We've got deals with almost everybody," Deis told Reuters,noting the city now has struck deals with all but three of its19 major creditors.

Talks with the three will continue, Deis added.

Marc Levinson, Stockton's lawyer, also said the talks wouldcontinue. But he said the city is eager to file its plan foradjusting its debt to exit from bankruptcy and anticipates itwill do so next Monday or Tuesday.

The deal with Assured follows Stockton's release last weekof a draft plan for adjusting its debt that disclosed a dealwith bond insurer National Public Finance Guarantee over about$45 million in outstanding lease revenue bonds for the city'sarena.

Payments for the arena bonds will be cut by 3 percent. Otherbonds insured by National and related to parking garages will becut by 12 percent, while a third bond for a city building willbe paid in full.

Stockton's agreement with Assured allows the bond insurer totake possession of a city building and receive revenue itgenerates to service about $35 million in outstanding bonds thecity had sold to acquire the building.

The agreement with Assured also allows Stockton to makepayments on about $120 million in outstanding pension obligationbonds until 2052 from their original 2038 term.

"The settlement includes a unique and innovative instrumentthat enables Assured to participate in the city's future revenuegrowth," the bond insurer said in a statement confirming theagreement.

The deal with Assured carries two key conditions: that thejudge hearing Stockton's bankruptcy case confirm its plan toadjust its debt and that city voters approve a tax measure inNovember.

The measure would raise Stockton's sales tax to raiserevenue to help the city bolster its finances and hireadditional police officers. A top reason Stockton's city councilapproved a bankruptcy filing was that it feared making deepercuts to police services amid a spike in violent crime.

Without revenue from the tax increase, Stockton would needto cut $11 million in spending, which could fall on libraries,community centers and fire houses, according to Deis.

Assured and National led efforts by Stockton's so-calledcapital markets creditors to block the city's bankruptcy case,contesting the city's defense of its pension spending.

The insurers wanted that spending, which is broadly ofrising concern in the municipal debt market, restructured alongwith city debt.

With about 300,000 residents, Stockton set itself apart inbankruptcy proceedings from Detroit, which has filed the largestU.S. municipal bankruptcy, and smaller San Bernardino,California, which filed for bankruptcy last year, by insistingon defending its pension payments.

The $272 billion California Public Employees' RetirementSystem, the biggest U.S. public pension fund, was prepared tohelp the city battle its bond insurers in court.

U.S. Bankruptcy Judge Christopher Klein in April foundStockton eligible for bankruptcy protection and said theshowdown the insurers sought over payments to the pension fundwould have to wait until the city filed its plan for adjustingits debt to exit from bankruptcy.

The deals with Assured and National mean that fight won'ttake place and Stockton's pension plan remains whole. But thecity will see savings on pension spending due to concessionsfrom employee groups and changes in state law, according toDeis.

Stockton officials have defended the city's pension programas necessary for retaining and recruiting employees afterslashing the city's workforce in the run-up to filing forbankruptcy while revenue was plunging due to the recession and acrash in the local housing market.

The officials have also defended pension spending bypointing to pay and benefit concessions by employees to helprepair Stockton's finances and to the elimination of the city'ssubsidy for healthcare for about 1,100 of its retired employees.

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