Bond insurer Assured Guaranty says Stockton's bankruptcy plan is unfair.

Stockton, Calif., is proposing to temporarily cut personnel costs by 6.6% while permanently cutting payments on the Assured-insured pension obligation bonds by 83%, the company said.

In its bankruptcy proposal the city would stop all general fund payment on the pension bonds, Assured said. Effectively, it would have to cover 83% of the bond principal of $121 million, or $100.4 million. In addition, the insurer would have to make the interest payments.

"At the same time, the city proposes to make no reductions to its required contributions due under its pension plan," Assured said. "Importantly, debt service on the pension bonds represents just 3% of the city's general fund expenditures for fiscal 2012-13. In contrast, the city's remaining personnel costs (which include current pensioner contributions) comprise 68% of the city's projected expenditures."

"Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another," Assured said. "Among the small number of municipalities to file for bankruptcy (43 since 1981), none of the cases resulted in implementing cuts to principal owed bondholders."

"The inescapable conclusion is that holders of the pension bonds and Assured Guaranty are being unfairly targeted for permanent impairment while similarly situated creditors are not," the insurer said. Stockton's targeting of the pension bonds is "inconsistent with Chapter 9's strict requirements for plan confirmation."

Assured has until Aug. 9 to formally challenge Stockton's bankruptcy filing, according to Reuters.

By insuring the pension bonds, Assured set up Stockton to save more than $100 million over time, the company said in a press release.

While Stockton did not respond to a request for comment for this story, in June Stockton city manager Bob Deis told The Bond Buyer that the city had reduced employee salaries between 9% and 23%, eliminated 43% of non-safety staff, rolled back its fire employees by 30% and cut 25% of its police force in the second most violent city in California.

Stockton is part of the California Public Employees Retirement System, meaning the state Legislature would need to sign off on pension benefit changes, Deis noted.

Stockton's employee pension benefits are "constitutionally protected rights of the city's employees and retirees, many of whom have spent their entire career in public service," CalPERS general counsel Peter Mixon wrote.

"The obligations owed to the public workers of the city have priority over those of general unsecured creditors including bondholders," Mixon wrote. "Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks."

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