Bankrupt California city mulls tax hike to restore solvency

Fri Jun 21, 2013 4:33pm EDT

* Stockton's sales tax hike would also fund hiring 120 cops

* Tax plan seen assisting city's plan to exit bankrupcty

* City budget plan includes $12 billion in debt payment defaults

By Jim Christie

SAN FRANCISCO, June 21 (Reuters) - Almost a year since Stockton, California became the biggest U.S. city to file for bankruptcy, its leaders will review a tax plan aimed at restoring it to solvency and reducing crime in one of the 10 most dangerous U.S. cities.

Stockton's City Council will take up the plan on Tuesday along with a budget proposal that comes after an April ruling by U.S. Bankruptcy Judge Christopher Klein that approved letting the city draft a plan for adjusting its debts.

The tax plan would raise Stockton's sales tax to 9 percent from 8.25 percent. Proceeds would go to hiring 120 more police officers, and for other safety programs, and to help Stockton exit from bankruptcy, a goal the city could trumpet in the debt-adjustment plan it will file with Klein in September.

"It's to fund what we believe will be a very satisfactory plan of adjustment and restore public safety services, but in a very strategic way," City Manager Bob Deis told Reuters by telephone on Friday.

A tax plan would bolster Stockton's standing in court when it files its debt adjustment plan, said lawyer Michael Sweet, a municipal bankruptcy specialist at Fox Rothschild in San Francisco.

"Folks are thinking about what you need to do to get a plan through the court," said Sweet, who is not involved in Stockton's case. "A tax increase could be a component of a bankruptcy exit strategy."

Deis said he could not provide details on how revenue from his proposed tax increase would be allocated as Stockton and its creditors are in confidential talks while the city's bankruptcy case moves forward in court.

Stockton's case is seen in the municipal debt market as a test of whether bondholders or pensioners will absorb most of the financial pain when a local government goes broke.

While Stockton has kept current on its payment to the California Public Employees' Retirement System, the state pension fund, it has defaulted on $12 million in debt payments.

The budget plan proposed by Deis to Stockton's City Council proposes the city not pay $12.6 million due to its creditors, including $6.3 million for pension obligation debt, during its next fiscal year beginning next month.

Bond insurers Assured Guaranty and National Public Finance Guarantee have been at war with Stockton since it filed for bankruptcy nearly a year ago, attacking the city's plan to keep pension payments intact while seeking to force its creditors to swallow steep losses.

Assured and National have more than $240 million of combined exposure to Stockton's general fund-backed debt and say the city in California's Central Valley can not repair its finances without reining in pension spending.

Klein said in April a showdown over Stockton's pensions payments would have to wait on the city's plan to adjust its debt. He has the power to approve or reject the plan.

Stockton has already put a number of measures in place to restructure its finances. They include several years of austerity, pay and job cuts, concessions from city unions and representatives for retired city workers last week agreeing to take a mere $5.1 million from the city to settle disputes over the loss of their subsidized medical coverage.

Stockton cut $90 million in spending from 2008 to last year, which included cuts that reduced its police force just as violent crime spiked and placed the city on the FBI's list of the 10 most dangerous U.S. cities.

Without revenue from the tax hike, Stockton's general fund would face deficits ranging from $8.6 million in fiscal 2014-15 to $79.1 million in fiscal 2020-21, according to Deis' office.

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