SAN FRANCISCO — Stockton’s bankruptcy filing has already sparked a war of words between the California city and a bond insurer with a lot to lose in the case.
Less than 24 hours after the city’s Chapter 9 filing on Thursday, Assured Guaranty Corp., which insures more than $160 million of Stockton bonds,
“Bankruptcy was not the city’s only option,” Assured said in a statement released Friday. “The City Council has failed to make the politically tough decisions to adopt serious budget reforms and consider alternative plans to resolve its long-term structural deficit.”
Assured said the city hasn’t “engaged in any meaningful effort” to improve its finances outside of bankruptcy such as raising taxes, selling assets or reforming its pensions.
The insurer said it even offered the city its team of “turnaround experts” to help them avoid bankruptcy.
“Stockton’s City Council has not given its citizens a chance to weigh in on their future,” the statement said. “Bankruptcy will not only be costly and lengthy, but it will also have a negative, lasting impact on the city’s recovery for years.”
The insurer said it will oppose the bankruptcy filing.
Assured’s accusations led to a riposte from Stockton city manager Bob Deis, who called the “arrogant tone” of the insurer’s comments “almost comical.”
“These people are suggesting they haven’t made the tough decision? That smacks of arrogance or a lack of understanding of what the City Council has done, or maybe these people are suggesting they want anarchy in the streets of Stockton so they can get paid,” Deis said in a phone interview.
He noted the council has reduced salaries between 9% and 23%, eliminated 43% of non-safety staff, rolled back its fire employees by 30% and cut 25% of it police force in the second-most violent city in California.
The city manager said Assured’s implication that Stockton could reform its pension system as San Jose and San Diego have recently attempted shows a lack of understanding.
Stockton is part of the California Public Employees Retirement System, meaning the state Legislature would need to sign off on benefit changes, Deis noted. San Diego and San Jose have their own independent retirement systems.
The Chapter 9 filing came after the city spent 90 says in a mediation process with creditors under terms created by the state’s recently enacted AB 506.
“We are asking the judge to take the veil off the AB 506 process — once that occurs, I think you will find that Assured is misrepresenting what they have done,” Deis said.
Assured Guaranty appears to be among those most exposed to the bankruptcy. It insures $161.4 million of bonds: $121 million of 2007 pension obligation bonds and $40.3 million of 2007 variable-rate lease revenue bonds.
“The city of Stockton saved millions of dollars in interest costs as a direct result of the lower interest rates associated with our guaranty,” the insurer said. “The city proposes to treat these bonds in an unfair and disproportionate manner relative to its personnel costs.”
The second largest insurer of Stockton debt, National Public Finance Guarantee Corp., issued more tempered comments.
National “will continue to work with the appropriate parties toward a solution that addresses the city of Stockton, California’s structural deficit, and respects the rights of creditors and the expectations of the municipal finance markets,” Willard Hill, a spokesman for National, said in a statement.
National insures $45 million of redevelopment revenue bonds used to build an arena, $31.6 million of 2004 lease revenue bonds, and $12 million of 2006 lease revenue refunding bonds.
Major creditors listed in the bankruptcy court filing include the California Public Employees’ Retirement System with $147 million of unfunded pension costs.
CalPERS will work with the affected parties to address the pension obligations “within our fiduciary responsibility and the laws we must follow,” spokesman Brad Pacheco said in a email.
“It’s not just about money to pay bills,” he said. “The implications of bankruptcy impact the lives of every citizen, including public employees who are counting on retirement security for the service they have provided to the city. “
Wells Fargo is listed as a creditor as trustee for six different bond issues representing $255 million of debt.
The bank said in a statement that it will “take an active role” in the bankruptcy proceeding since it has the legal duty to protect the interests of bondholders.
Stockton has more than $300 million of bonds outstanding tied to its general fund, and more than $700 million in bond debt overall.
The city filed for protection in the U.S. Bankruptcy Court’s Eastern District of California in Sacramento.
Stockton’s City Council officials moved towards bankruptcy when it voted on Feb. 28 to enter into Assembly Bill 506 mediation.
City Council members voted 6-to-1 earlier in the week to adopt a spending plan for fiscal 2013 that assumed the Chapter 9 filing.
Stockton will miss $12 million of debt payments as it tries to prevent insolvency before the court approves a restructuring plan.
It also plans to spend $3.5 million on the restructuring.
