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SACRAMENTO, Calif., June 12 (Reuters) - Bankrupt Stockton, California, will pay a $5.1 million settlement to retired employees losing health benefits as part of its plan to restructure its finances while maintaining their pensions, which the city's creditors say need to be impaired.
Lawyers for Stockton, the biggest U.S. city to have filed for bankruptcy, and representatives of the retirees announced the settlement on Wednesday in U.S. Bankruptcy Court in Sacramento, California, during a hearing on how the city's bankruptcy case is proceeding.
The settlement amounts to only 2 percent of the value of the health benefits the retirees are losing but it leaves intact their pensions, said Steven Felderstein, a lawyer representing a group for retired city employees.
Stockton's bankruptcy case is being watched closely in the U.S. municipal debt market because of the city's size and because its financial restructuring plan favors pension payments over bondholders.
The retirees must still vote on the settlement, which would go into effect when Stockton's plan to adjust its debts is approved. Stockton, which has faced slumping revenue from the housing bust, filed for bankruptcy last year after $90 million in spending cuts since 2008 failed to keep its books in balance.
Bond insurers Assured Guaranty and National Public Finance Guarantee have been leading challenges in court to Stockton's bankruptcy. They had a combined exposure to Stockton's general fund-backed debt of more than $240 million as of March.
They oppose the city's plan for its capital markets creditors to swallow steep losses while the city keeps current on its pension payments to the California Public Employees' Retirement System.
Lawyers for the insurers have argued Stockton will never repair its finances without reining in pension spending. Officials for the city of roughly 300,000 residents in California's Central Valley counter that the state pension fund is not a creditor and that they have forced losses on their workforce with job cuts, austerity measures and phasing out retiree health coverage.
The state pension fund maintains California law protects it and pensioners from any losses even in a municipal bankruptcy.
U.S. Bankruptcy Judge Christopher Klein in April ruled Stockton eligible to press on with its bankruptcy case, allowing the city to begin drafting its plan for adjusting its debts. Stockton plans to file the plan in the third quarter.
He has said the dispute over Stockton's pension payments will have to wait for legal review, provided the city keeps them up in its plan to adjust its debts.
Separately, Stockton spokeswoman Connie Cochran said City Manager Bob Deis would retire in November.
Stockton hired Deis in 2010 as its finances strained under the pressure of sinking revenue due to the crash of the city's once red-hot housing market. He has been instrumental in Stockton's bankruptcy efforts and is working on a tax plan that would raise revenue for police and other crime-fighting programs as well as for bolstering the city's finances.