LOS ANGELES – Stockton, Calif. received a City Council green light for its bankruptcy exit plan after reaching a deal with Assured Guaranty to restructure over $155 million of insured bonds.
City manager Bob Deis told the council that Stockton now has deals with every bond insurer that’s involved in the bankruptcy process.
“The end is near, accomplishing our goals, ending the fiscal crisis, and I think you should be proud of how far we’ve come,” Deis told the council on Thursday.
The city reached a deal Wednesday on two of its biggest debt obligations – lease revenue bonds and pension obligation bonds wrapped by Assured Guaranty.
“We feel that this settlement agreement really provides an opportunity for us to end up with a full recovery on both debt instruments — both the lease revenue bonds and on the POBs,” said Robert Tucker, managing director of corporate communications at Assured.
In a presentation during the meeting, Andy Belknap, a vice president at municipal consulting firm Management Partners, said Stockton has around $40.4 million of insured outstanding variable rate bonds that it sold to acquire a building that would be used for its city hall. Assured puts the outstanding amount closer to $35 million, according to June estimates.
Under the agreement, Assured will get the legal title to own the building outright and can either lease out the building or sell it.
The city will be allowed to lease space in the building for eight to 12 years at an advantageous rate, even if Assured decides to sell it. The bond insurer said in that case, the sale would include a provision for the city’s lease.
Tucker said Assured believes it’s in a position where it can achieve a full recovery on that lease-revenue exposure.
The city agreed to divert general fund payments that it would have been made toward the lease revenue bonds toward another deal insured by Assured Guaranty — around $124.3 million of pension obligation bonds. Assured puts the current number closer to $120 million.
Stockton will continue to make full payments toward the non-general fund component of the POBs, representing about 17% of the principal.
The city will make additional cash payments on the POBs of $250,000 per year starting in 2023, and moving to $350,000 per year from 2042 to 2052. The bonds originally had a final 2037 maturity.
While the city will have more time to repay its obligations, the bondholders will still receive repayment of principal and interest from Assured in full on the original schedule, Tucker said.
“The agreement is structured to give the city until 2052 to repay us on the POBs, so we’re extending the maturity on the city’s repayment obligation—not on the bonds, just on the repayment to Assured,” Tucker said. “We’re basically providing liquidity payments and the structure provides us an opportunity for full recovery.”
The net present value of the payments the city agreed to make relative to obligations is 51%, according to Belknap’s presentation. Assured said the nominal amount is above 73%.
The city also agreed to additional contingent payments on the POBs if performance of Stockton’s core revenues in future years exceeds the city’s forecast. If revenues are above the baseline forecast, Assured will share some of those revenues with the city.
Belknap said during the city council meeting that this was one of the most creative ideas they’ve had, with the help of court-appointed mediator, Judge Elizabeth Perris.
“The agreement underscores our long-term commitment to the city and our belief that Stockton will be able to exit bankruptcy with an ability to regain its financial health,” Tucker said.
Stockton released its plan of adjustment last week, which said the city would continue making its payments to the California Public Employees’ Retirement System, and also disclosed a deal with National Public Finance Guarantee regarding $88 million of outstanding bonds.
The city agreed to resume lease payments on $45.1 million of National-wrapped obligations for the city’s sports arena, and $43.7 million of debt secured by parking garages, which would guarantee continued city control of the properties. Stockton made a deal with Ambac Assurance in February.
Stockton has not yet reached an agreement with Franklin Advisers, Inc., Franklin High Yield Tax Free Income Fund, and Franklin California High Yield Municipal Fund, which together own around $35 million of the city’s lease revenue bonds.
The next step is for Deis to file the plan in court where it must then receive approval from U.S. Bankruptcy Judge Christopher Klein.
If approved, Deis estimates that it will take six months of court proceedings and mediation for the city to exit bankruptcy.
“I got to tell you that’s warp speed for bankruptcy,” Deis said. “Stockton has been in this decline state, working towards this fiscal crisis for 15 years, and we’re fixing it in four. I think that’s pretty good work.”
However, he noted that the plan is conditioned on the passage on Nov. 5 of a ballot measure to impose a ¾ cent sales tax increase.
According to the bankruptcy plan, if the measure does not pass, the city will be unable to fund the plan, and it will be unable to pay its current operating costs.
The Central Valley city of 300,000 declared bankruptcy in June 2012, after struggling to recover from the housing downturn and years of fiscal emergencies. As a result of prior poor fiscal management, overspending on construction projects, the economic downturn and resulting decline in home values, and lower tax revenues, the city had virtually no general fund reserves.
In the past three years, the city says it has cut its general fund workforce by 30%, reduced compensation by $52 million and cut staffing and service levels by $38 million.