By Jim Christie
SACRAMENTO, Calif., March 27 A verbal ruling on
whether Stockton, California, is eligible for bankruptcy
protection will likely come next Monday, a federal judge said on
the third and final day of a trial on the matter that the U.S.
municipal debt market is closely watching.
U.S. Bankruptcy Judge Christopher Klein said he would need
more time than anticipated to make a ruling over whether
Stockton should be allowed to press on with its bankruptcy case,
which could result in bondholders and bond insurers of the city
swallowing losses while leaving pensions of city workers and
"I'm pretty confident I will not be in a position to make my
findings by Friday," Klein told attorneys for Stockton and its
so-called capital markets creditors at the third hearing of the
trial that started on Monday.
Stockton aims to aggressively impair its bond debt if found
eligible for bankruptcy court protection, a strategy other
cash-strapped municipalities could follow, breaking a tradition
in the $3.7 trillion municipal bond market, which provides
financing for various public capital projects, from school
construction to sidewalk repairs.
Since at least the 1930s, bondholders in major municipal
bankruptcies have consistently repaid their entire principal.
If Stockton establishes it is eligible for bankruptcy
protection, other financially troubled municipalities could
follow its example and try to adjust debts through bankruptcy.
A city of nearly 300,000 in California's Central Valley,
Stockton filed for bankruptcy last year, becoming the biggest
U.S. city to declare bankruptcy.
Bond insurers Assured Guaranty Corp, Assured Guaranty
Municipal Corp and National Public Finance Guarantee Corp have
been joined by Wells Fargo Bank, the Franklin California High
Yield Municipal Fund and Franklin High Yield Tax-Free Income
Fund in contesting Stockton's bid for bankruptcy eligibility.
The insurers have more than $300 million of exposure to the
city's debt and have said that Stockton's decision to keep
current payments to its largest creditor, the California Public
Employees' Retirement System, showed lack of good faith during
the initial stages of the city's bankruptcy plan.
The $254 billion pension fund manages pension accounts for
Stockton's current and retired employees.