May 13, 2014 / 1:21 AM / 3 years ago

Stockton's holdout creditor questions why the city can't pay up

3 Min Read

SACRAMENTO, Calif., May 12 (Reuters) - A holdout creditor suggested on Monday that Stockton's top financial consultants may have been too fiscally conservative in its proposed debt adjustment plan, a blueprint at the center of its municipal bankruptcy case.

In the first day of a closely watched trial over Stockton's proposed bankruptcy exit plan, the city's biggest remaining creditor questioned long-term estimates for property and sales tax revenues and its expectations for cash reserves.

Attorneys for Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund, which Stockton has proposed to pay pennies on the dollar, predicted that the city's witnesses would not admit in court that the city could not pay Franklin. Instead, Stockton wanted to use its money in other ways, said James Johnston, attorney for Franklin.

"The city wants to throw Franklin into that historic trough, from which it is now emerging, and throw dirt into the ditch," Johnston said in his opening statements.

In a trial scheduled to last four days, U.S. Bankruptcy Court Judge Christopher Klein must determine if Stockton's exit plan is feasible and fair and if the city can withstand its pension obligations in the years to come.

Stockton's financial advisers and managers cautiously developed a proposal to end its two-year-long foray into Chapter 9 protection, said Marc Levinson, the attorney representing Stockton.

"If the court doesn't confirm this plan, it'll likely send us back to the drawing board," said Levinson.

But Franklin objects to the city's expectation that it will eventually increase its minimum cash reserves while giving Franklin $94,000 for a $35 million loan.

Stockton is still contending with "a daunting array of needs that the city has not funded," including police services and deferred maintenance projects, said Robert Leland, senior manager at the consulting firm Management Partners, who was hired by Stockton to develop a long-range financial plan.

Without sufficient contingencies, "the city is on the brink of bankruptcy every year," Levinson said.

Stockton's Chief Financial Officer Vanessa Burke said the money that was originally allotted to pay Franklin, revenue from public facility fees, was now committed for future infrastructure projects.

Stockton's bankruptcy, one of only a handful of municipal insolvencies in the country, has been watched closely to see how it affects bondholders compared to retirees and other creditors.

Stockton reaffirmed its plan to leave its pensions untouched, admitting that "pension obligations are large and painful, but the city concluded a long time ago it has no choice but to make those payments," Levinson said. (Editing by Eric Walsh)

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