SAN FRANCISCO — Stockton, Calif.'s bond insurers are contesting the city's bankruptcy filing, saying the city is unfairly targeting bondholders while asking nothing from its largest unsecured creditor, the California Public Employees' Retirement System.

The city's two insurers, Assured Guaranty Ltd. and National Public Finance Guarantee Corp., a subsidiary of MBIA Inc., seek a showdown in court later this month over where bonds stand in seniority compared to pension liabilities.

Partly because of the allegations that Stockton showed favoritism towards CalPERS, the largest employee pension system in the county, the insurers are arguing the city did not negotiate or file its bankruptcy petition in "good faith."

"The city targeted its bondholders and left CalPERS and serious labor concessions off the negotiating table," Assured said in its objection. "In essence, the city conveyed on its employees the benefit of its booming revenues when times were good and seeks to shift the cost of that decision to the capital markets now that revenues have declined."

Assured said in its filing that Stockton has failed to prove it is insolvent because it has not done everything possible to shore up its budget, including reallocating available fund balances, selling non-essential city property, curtailing non-essential services and privatizing others, and raising revenues.

In order for the judge to accept the city's bankruptcy petition, it must meet stringent requirements, including those being challenged by the insurers.

Stockton officials have dismissed similar allegations made by Assured, saying the insurer lacks an understanding of the city's dire position. They say Stockton, as a member of CalPERS, needs the approval of the California Legislature to make any changes to its benefits.

The city's proposal to creditors during unsuccessful mediation sessions before it filed for bankruptcy included a five-year holiday on all payments from the general fund toward debt service, and permanent elimination of all general fund payments toward the city's pension obligation bonds, wiping out about $100 million of that debt, which is wrapped by Assured.

According to the city's "ask" mediation proposal, Stockton wants to save $25 million in fiscal 2013, of which $4.8 million would come from labor concessions, $7 million from the gradual elimination of retiree health benefits and $10.5 million from cutting its bond debt.

The city's obligations to CalPERS, which are projected at $17 million in fiscal 2013 and expected to increase to more than $30 million annually by 2020, are untouched by the city's proposal.

CalPERS officials said in a statement Friday that it participated in the mediation process with the city and provided information and other forms of assistance to Stockton.

"We remain committed to safeguarding the constitutionally protected pension benefits of the city's employees and retirees, many of whom have spent their entire careers in public service," CalPERS said.

The POBs would get an 83% haircut under Stockton's proposal, with the only obligation the city intends to honor coming from its enterprise funds.

Assured said bondholders, which represent only 8% of the general fund budget, make up 42% of the city's proposed savings, while current employees make up 51% of the general fund budget yet only contribute 19% of savings.

Assured said Stockton continues to benefit from the proceeds from the bond because CalPERS continues to hold and invest those proceeds, which are also going towards determining what the city owes the retirement systems.

National's filing also targets what it sees as an unfair bias towards CalPERS, pegging Stockton's liability to CalPERS at $413 million rather than the city's estimate of $245 million over the next 10 years.

"Despite the city's massive CalPERS liability, the city did not even ask for any reductions from CalPERS, which is the very liability that the city blames for its financial situation," National said in its filing.

National has said it is exposed to $89 million of debt linked to Stockton's general fund, mostly through lease revenue bonds, much of which the city has already defaulted on.

Stockton will finalize its proposal to restructure its debts when it submits its plan of adjustment to the bankruptcy court.

The next hearing in the case is set for Aug. 23 in the Eastern District of U.S. Bankruptcy Court in Sacramento.

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