In last day of trial, Stockton, Calif., argues for end to bankruptcy

June 4 Wed Jun 4, 2014 10:13pm EDT

June 4 (Reuters) - In the final day of a trial to determine if Stockton, California, is ready to end its two-year pilgrimage through Chapter 9 bankruptcy protection, the city argued its plan to handle its liabilities to creditors, public workers and the state's pension fund was fair and equitable.

The trial's proceedings on Wednesday, plus the four days of hearings in May, mainly focused on the Northern California city's holdout creditor - two funds managed by Franklin Templeton Investments - which the city has proposed to offer less than a penny on the dollar.

But the $3.7 trillion municipal bond market is closely watching this trial for an additional reason: to see how the court handles the treatment of pension obligations, which the city has proposed to leave untouched.

Last month, U.S. Bankruptcy Court Judge Christopher Klein said he would venture into largely untrodden territory to determine whether the country's largest pension fund, the California Public Employees' Retirement System, could be forced to take a loss as other creditors do in municipal bankruptcies.

On Wednesday, the city, its retirees and Calpers presented a united front in urging the judge to leave pension obligations alone in his ruling.

"The bottom line is this: The city has made a business judgment to honor its Calpers commitment," said Stockton attorney Norman Hile. "If Calpers were to terminate the city's contract, the city could not possibility pay that enormous liability."

Calpers has calculated that if Stockton's contract with the $285.2 billion pension fund were to end, Stockton would face an unprecedented $1.6 billion termination fee. It would also ensure that "the parties in this case are involved in expensive litigation," said Calpers attorney Michael Gearin. "I think that would be unfortunate."

Facing a severe haircut on its $35 million loan, Franklin described Stockton's plan in closing arguments as a "true hardball cramdown" in which the city decided "to forgo its one opportunity to adjust pension liability and actually do something about the problem that put it in this bankruptcy case in the first place," said James Johnston, attorney for Franklin.

Franklin's attorneys also argued the city had proposed an overly conservative long-range financial plan that built up reserve funds while leaving "nothing left over for Franklin."

Judge Klein's first step in ruling on Stockton's proposed "exit plan" is scheduled for July 8, when he expects to address the city's valuation of Franklin's collateral, including two golf courses and a park.

The city has argued that the collateral is worthless, in part because the golf courses lost $3 million over the past six years and require millions more in repairs. Franklin's attorneys tried to debunk that idea during the hearing in May with an expert witness who said the golf courses could be sold at a profit. (Reporting By Robin Respaut; Editing by Ken Wills)