SAN FRANCISCO — The National Federation of Municipal Analysts has filed another brief in the Vallejo, Calif., bankruptcy case in support of bond insurer National Public Finance Guarantee.

The NFMA said Wednesday it resubmitted an amicus curiae — or friend of the court — brief to the U.S. Bankruptcy Court for the Eastern District of California in support of NPFG's lawsuit claiming the bankrupt city is not entitled to divert fees from a state credit-enhancement program. The bond insurer asks that funds from a state aid intercept program be diverted from the city to owners of NPFG-insured certificates of participation.

NPFG submitted a new complaint after withdrawing its original motion in October following a tentative ruling by Judge Michael McManus denying the complaint on procedural grounds. The NFMA also filed a similar brief in September in the case that was also pulled when the insurer withdrew its motion.

"The NFMA rarely files amicus briefs, and almost never at the trial court stage," NFMA said in a statement last week. "However, the NFMA board felt strongly that an exception should be made in this case, given that the complaint filed by National has such far-reaching ramifications for the municipal bond market."

The intercept program cited in the NFMA motion — the vehicle-licensing fee enhancement program — secures some bonds issued by municipalities in California. Revenues secured by the intercept pledge can be diverted from a bond issuer like Vallejo and sent directly to a bond trustee for debt-service payments.

Vallejo, which has a population of around 120,000, filed for bankruptcy in 2008 in response to what it said were unsustainable labor contracts and dwindling tax collections. That move represents the largest municipal bankruptcy in the state since Orange County filed in 1994.

The bankruptcy filing affected $53 million of debt backed by the city's general fund, including certificates of participation sold in 1999. The deal carried insurance and a debt-service reserve surety bond from MBIA Insurance Corp., carried by its subsidiary NPFG.

Union Bank of California, which provided the letter of credit on Vallejo's defaulted debt, is owed more than $20 million from general fund obligations and around $50 million by the city, while insurer NPFG is owed about $5 million.

The NFMA said denial of the motion would have a potentially devastating effect on access to capital for cities, towns, counties, school districts, and other municipalities in California, as well as across the country.

The NFMA claims that 34 similar intercept programs in 24 states, supporting billions of dollars of debt issued by municipalities, are potentially at risk of significant downgrades if the motion from NPFG is rejected.

The city's bankruptcy lawyers have described the NFMA claim as "utterly speculative" and said there was no evidence a denial would devastate California's municipal credit markets.

Vallejo has taken the position that the intercept mechanism is unenforceable given its Chapter 9 bankruptcy filing, and the revenues should continue flowing to the city even though it has defaulted on its debt-service payments.

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