By Jim Christie
STOCKTON, Calif. Oct 3 Stockton, California's
city council approved a plan on Thursday for the city to adjust
its debt to exit from bankruptcy after reaching a deal with bond
insurer Assured Guaranty to restructure more than $150 million
of outstanding debt.
The deal marks the end of a long and often bitter fight
between Stockton and its biggest bond insurers since the city
filed for bankruptcy last year and stunned the U.S. municipal
debt market with threats of forcing losses on bondholders while
leaving pension payments intact.
"Now we have deals with every bond insurer that's involved
in the bankruptcy process," Stockton City Manager Bob Deis said,
adding he is hopeful the city is on track to exit bankruptcy in
about six months.
"We've got deals with almost everybody," Deis told Reuters,
noting the city now has struck deals with all but three of its
19 major creditors.
Talks with the three will continue, Deis added.
Marc Levinson, Stockton's lawyer, also said the talks would
continue. But he said the city is eager to file its plan for
adjusting its debt to exit from bankruptcy and anticipates it
will do so next Monday or Tuesday.
The deal with Assured follows Stockton's release last week
of a draft plan for adjusting its debt that disclosed a deal
with bond insurer National Public Finance Guarantee over about
$45 million in outstanding lease revenue bonds for the city's
Payments for the arena bonds will be cut by 3 percent. Other
bonds insured by National and related to parking garages will be
cut by 12 percent, while a third bond for a city building will
be paid in full.
Stockton's agreement with Assured allows the bond insurer to
take possession of a city building and receive revenue it
generates to service about $35 million in outstanding bonds the
city had sold to acquire the building.
The agreement with Assured also allows Stockton to make
payments on about $120 million in outstanding pension obligation
bonds until 2052 from their original 2038 term.
"The settlement includes a unique and innovative instrument
that enables Assured to participate in the city's future revenue
growth," the bond insurer said in a statement confirming the
The deal with Assured carries two key conditions: that the
judge hearing Stockton's bankruptcy case confirm its plan to
adjust its debt and that city voters approve a tax measure in
The measure would raise Stockton's sales tax to raise
revenue to help the city bolster its finances and hire
additional police officers. A top reason Stockton's city council
approved a bankruptcy filing was that it feared making deeper
cuts to police services amid a spike in violent crime.
Without revenue from the tax increase, Stockton would need
to cut $11 million in spending, which could fall on libraries,
community centers and fire houses, according to Deis.
Assured and National led efforts by Stockton's so-called
capital markets creditors to block the city's bankruptcy case,
contesting the city's defense of its pension spending.
The insurers wanted that spending, which is broadly of
rising concern in the municipal debt market, restructured along
with city debt.
With about 300,000 residents, Stockton set itself apart in
bankruptcy proceedings from Detroit, which has filed the largest
U.S. municipal bankruptcy, and smaller San Bernardino,
California, which filed for bankruptcy last year, by insisting
on defending its pension payments.
The $272 billion California Public Employees' Retirement
System, the biggest U.S. public pension fund, was prepared to
help the city battle its bond insurers in court.
U.S. Bankruptcy Judge Christopher Klein in April found
Stockton eligible for bankruptcy protection and said the
showdown the insurers sought over payments to the pension fund
would have to wait until the city filed its plan for adjusting
its debt to exit from bankruptcy.
The deals with Assured and National mean that fight won't
take place and Stockton's pension plan remains whole. But the
city will see savings on pension spending due to concessions
from employee groups and changes in state law, according to
Stockton officials have defended the city's pension program
as necessary for retaining and recruiting employees after
slashing the city's workforce in the run-up to filing for
bankruptcy while revenue was plunging due to the recession and a
crash in the local housing market.
The officials have also defended pension spending by
pointing to pay and benefit concessions by employees to help
repair Stockton's finances and to the elimination of the city's
subsidy for healthcare for about 1,100 of its retired employees.