Stockton Rebuts Bond Market Creditors

SAN FRANCISCO — Stockton insists that it is eligible to file for bankruptcy, no matter what its creditors say.

Ahead of a bankruptcy court hearing set for next week, the California city filed a 65-page response with the U.S. Bankruptcy Court in Sacramento to legal objections made in December by what it calls "capital market creditors" fighting the possibility of unprecedented cuts to bond debt.

"Their assumptions are flawed, their methodology sloppy and their conclusions invalid," Stockton city manager Bob Deis said in a statement Friday night about the bond market creditors' objections.

The responses filed in court by the city were made public Monday morning. The hearing on the city's bankruptcy eligibility is set for Feb. 26.

The consortium of bond market creditors is made up of bond insurers Assured Guaranty Corp. and National Public Finance Guarantee, investor Franklin Advisors, and trustee Wells Fargo NA The main thrust of the different objections is that Stockton has failed to show it is insolvent and never negotiated in "good faith" as required by federal bankruptcy law.

Arguments include that Stockton could have cut more from nonessential services, such as its support for entertainment venues and libraries, and also raise concerns about the city's bookkeeping, which Stockton officials have admitted was incorrect in past years.

Deis said the city was obviously insolvent and wouldn't have been able to meet payroll if it hadn't filed for bankruptcy.

"Clearly, we are willing to negotiate in good faith. The proof is that the city has reached agreements will all nine of its employee labor groups," Deis said.

"Assured Guaranty believes Stockton's reply fails to rebut our main contention that the city budgeted itself into insolvency by refusing to employ all its options to reduce expenses and maximize revenues," the insurer said in a statement Monday.

During 90 days of mediation with creditors before it filed the bankruptcy petition, Stockton proposed slashing debt payments by more than $350 million, including permanently ceasing payments from the general fund toward $124 million in outstanding Assured Guaranty insured pension obligation bonds.

Assured has said bondholder claims represent only 8% of the city's general fund, while they were expected to account for 42% of savings in the plan proposed by Stockton during mediation. Legal experts have said the potential debt-service cuts are without precedent in other municipal bankruptcies.

That pitch could be part of the blueprint for restructuring debts that the city will offer the bankruptcy judge if it is granted protection.

Bond creditors have also pointed out that Stockton has refused to try to reduce its employee pension payments to the California Public Employees' Retirement System, its largest creditor as outlined in court documents.

"It is clear that any credible plan to restore the city's fiscal solvency for the long-term must address expenses related to employee and retiree wages and benefits," Assured said.

CalPERS filed a 38-page brief on Friday in support of the city's bankruptcy.

"The Capital Markets Creditors' public relations efforts and their litigiousness are an effort to bully the city into abandoning its provision of retirement benefits to its employees and retirees," the court filing said.

The retirement system said a large body of state law supports Stockton's obligations to CalPERS, calling it "nonsensical" to suggest the city could or should negotiate with them.

San Bernardino, the other California city petitioning for bankruptcy protection, has cut its pension payments to CalPERS, which wants to sue the city.

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