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SACRAMENTO, Calif., Aug 21 (Reuters) - The bankrupt city of Stockton, California is preparing a plan for adjusting its debt that it will unveil in September even as negotiations with its creditors press on, one of its lawyers said on Wednesday.
"Right now the draft of the plan is a cramdown plan," attorney Marc Levinson told U.S. Bankruptcy Judge Christopher Klein at a status conference hearing on the city's bankruptcy case held in Sacramento, California.
The cramdown plan would be filed with Klein despite objections by Stockton's creditors, notably bondholders led by bond insurers Assured Guaranty and National Public Finance Guarantee.
Bondholders and insurers, who will vote on the exit plan along with other creditors, contest Stockton's different treatment of pension and debt payments - an issue that could eventually find its way to the U.S. Supreme Court.
A majority of creditors and two thirds in amount of claims within each class of claims impaired under the plan must vote to approve it and Klein will ultimately decide if it meets other bankruptcy law requirements to go into effect.
A city of nearly 300,000 in California's Central Valley, Stockton filed for bankruptcy last year and was the biggest U.S. city to do so until Detroit filed last month.
Klein in April approved Stockton's petition for bankruptcy, a setback for its capital markets creditors, which had contested the city's bid for bankruptcy eligibility. They object to Stockton's payments into the state pension fund.
Klein has said the issue of pension payments may be reviewed after Stockton files its plan to adjust its debt. The city has said it is preserving pensions to retain and recruit employees, adding that its workers have already suffered pay and job cuts from austerity measures in recent years.
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. The city slashed the police department by 25 percent and cut other departments even more ahead of filing for bankruptcy protection.
Representatives for about 1,100 retired city workers have agreed to accept $5.1 million from Stockton to settle disputes over the city cutting off their subsidized medical coverage.
To raise money to help Stockton exit bankruptcy, its city council voted last month to put a measure increasing the city's sales tax on the November ballot. Revenue raised by the measure would also be used to increase spending on public safety.
While Stockton prepares its debt-adjustment plan and continues talks with its creditors, the judge overseeing San Bernardino, California's bankruptcy petition may rule on Aug. 28 on whether the city, which also filed last summer, is eligible for Chapter 9 protection.
Earlier this month, a city employees' union dropped its objection to San Bernardino's bankruptcy application, leaving the state pension fund for public employees the only party opposing the city's bid for bankruptcy court protection from its creditors.