UPDATE 2-Bankrupt California city to unveil adjustment plan Friday
* Stockton city council will review draft plan next week
* Final plan could be filed as soon as Oct. 4
* City and bondholders still in negotiations
By Jim Christie
SACRAMENTO, Calif., Sept 24 (Reuters) - The bankrupt city of Stockton, California, will present a draft plan on Friday to adjust its debt while it keeps negotiating with bondholders, a lawyer for the city told Reuters on Tuesday.
Stockton's city council will review the draft next week and a final version could be filed with the U.S. Bankruptcy Court in Sacramento on or shortly after Oct. 4, marking a milestone in the city's efforts to put its finances in order, attorney Marc Levinson said.
Levinson later told U.S. Bankruptcy Judge Christopher Klein during a hearing on Stockton's Chapter 9 municipal bankruptcy case that it was not clear whether agreements with bondholders would be part of the plan. But Levinson added he was hopeful ongoing confidential talks with Stockton's capital markets creditors will lead to agreements with them.
"Mediation is moving the ball forward," Levinson said.
In August Levinson said Stockton was preparing a "cramdown" plan to file with Klein despite creditors' objections.
After Stockton files its plan, bond insurers and bondholders will vote on the city's plan to exit from bankruptcy along with other creditors. A majority of creditors and holders of two-thirds of claims must vote to approve it.
A city of nearly 300,000 in California's Central Valley, Stockton filed for municipal bankruptcy last year and was the biggest U.S. city to do so until Detroit filed for protection from creditors this summer.
Klein in April approved Stockton's petition for bankruptcy, a setback for the city's capital markets creditors, which had contested the city's bid for bankruptcy eligibility.
The creditors, led by bond insurers Assured Guaranty and National Public Finance Guarantee, object to Stockton's keeping up its payments to the state pension fund while targeting bondholders for losses to help restructure its finances.
Alabama's Jefferson County in its bankruptcy restructuring plan in June also proposed losses for bondholders, becoming the first local government to do so since the 1930s.
At the hearing on Tuesday, Klein said he is prepared to hear arguments over Stockton's decision to keep whole its payments to the California Public Employees' Retirement System and not to bond holders. Klein will ultimately decide if the plan meets other bankruptcy law requirements to go into effect.
Stockton says it is maintaining pensions payments to retain and recruit employees, adding that its workers have suffered pay and job cuts from austerity measures in recent years and have agreed to concessions to help repair the city's finances.
Stockton cut $90 million in spending from 2008 to last year in response to a plunge in revenue triggered by the collapse of its once red-hot housing market, and since filing for bankruptcy the city has scrapped its costly program for about 1,100 retired employees.
In addition to cutting costs, Stockton aims to raise revenue to exit bankruptcy. A measure that would increase the city's sales tax will appear on the November ballot. Revenue raised by the measure would also be used to increase spending on public safety.
After Tuesday's hearing, Stockton said in a statement that it had reached a tentative agreement with the local ice hockey team, Stockton Thunder, that would raise revenue for the city and reduce its payments for arena operations by approximately $200,000 a year. The agreement will be included in the city's debt plan.