By Jim Christie
SAN FRANCISCO Feb 28 Stockton,
California's city council approved a plan late on Tuesday night
for the city to skip some bond payments in an effort to
restructure its precarious finances and avoid becoming the
biggest U.S. city to file for bankruptcy.
Along with defaulting on about $2 million of debt payments
through the end of its current fiscal year, the city located
about 85 miles east of San Francisco will seek mediation with
its major bond holders to try to get a break on its debt to help
tackle a budget gap projected to range from $20 million to $38
A state law approved after Vallejo, California's 2008
bankruptcy requires negotiations in front of a mediator that
could last up to 90 days with creditors, bond insurers, public
employee unions and retired government employees before a local
government can file for bankruptcy.
While Stockton officials say they hope to avert bankruptcy,
the city of 292,000 people in California's Central Valley has
hired an attorney who represented much smaller Vallejo, which
drew national attention to financial problems of local
governments in the most populous U.S. state.
Stockton's attorney, Marc Levinson, said mediation
could keep the city from following in Vallejo's footsteps and
suffering the stigma of bankruptcy.
"This is really the city's last and best chance to avoid a
bankruptcy case," Levinson said.
But Stockton residents who have seen hard times grip their
city in recent years are bracing for the possibility it will
land in bankruptcy court despite its financial restructuring
"That's the end of the plank - and we're on that plank,"
68-year Stockton resident Rosalio Estrada told Reuters.
Stockton has long been a commercial hub for California's
rich agricultural industry and during the state's recent housing
boom the city became an affordable bedroom community for the San
Francisco Bay area.
But the housing downturn devastated Stockton's economy,
sending local unemployment and foreclosure rates soaring and the
city's revenue tumbling, forcing local officials to slash
spending and city payrolls.
Stockton's finances have also been hurt by two decades of
poor management, generous retirement benefits for city workers,
unsustainable labor contracts and too much debt, said City
Manager Bob Deis, who last week made public the default and
Deis said Stockton can neither afford more cuts to its
services to save money nor raise revenue with tax increases due
to the city's weak economy, leaving the city little option but
to ask its major bond holders for a break on some its debt.
Wall Street reacted swiftly to Deis' default plan by cutting
Stockton's credit rating.
Moody's Investors Service on Friday lowered Stockton,
California's general fund-supported debt ratings to below
investment grade, a move affecting about $341 million in debt,
and Standard & Poor's Ratings Services cut its issuer credit
rating on the city to speculative grade.
Fitch Ratings on Monday downgraded by several notches its
underlying ratings on four series of Stockton Public Finance
Authority water revenue bonds, leaving each at BBB-, the firm's
lowest investment grade rating. Fitch does not rate the city.
Investors holding Stockton's bonds subject to default -
variable-rate debt and two series of lease-revenue bonds - would
still receive some payment as the debt is largely insured or can
be paid from a reserve fund.
Even so, Moody's said in a note that by suspending debt
payments Stockton would show a "significantly reduced
willingness, if not ability, to make full and timely debt
Stockton officials may be using default and talk of
bankruptcy to try to wring concessions from city labor units to
further cut expenses, said Matt Dalton, chief executive of Belle
Haven Investments in White Plains, New York, which has more than
$1 billion in municipal bond assets under management.
"They need to fire a shot across the bow so that everybody
knows they're serious," Dalton said.
Neil Hokanson of Hokanson Associates, a wealth management
firm in Solana Beach, California that oversees about $420
million in assets, doubts Stockton is angling for an advantage
because the city's economy is in the dumps.
Nearly one in five Stockton residents live below the poverty
level, according to the U.S. Census Bureau, and the city's
unemployment rate in December was 15.9 percent, down from 18.1
percent a year-earlier but well above the national average of
8.3 percent and California's lofty 10.9 percent that month.
"It's not just gamesmanship. I think their hand is really
being forced," Hokanson said.
(Reporting By Jim Christie; Editing by Eric Walsh)