SACRAMENTO May 14 An adviser to Detroit's
historic Chapter 9 restructuring argued on Wednesday in court
that the bankrupt city of Stockton, California, could afford to
pay its holdout creditor more than pennies on the dollar.
Stockton plans to give other creditors significantly more
than what it has proposed to pay two funds managed by Franklin
Templeton Investments, said Charles Moore, a senior managing
director at Conway MacKenzie Inc, a turnaround consulting firm
for distressed organizations. He also described the city's
pension obligations as "high, growing and unpredictable."
"If there is a willingness to pay, there is cash in the
forecast to pay Franklin," said Moore. "The key point is
willingness to pay."
Moore took the stand as an expert witness for Franklin on
the third day of a closely watched trial to determine if
California's largest bankrupt municipality is ready to end its
two-year foray into Chapter 9 protection.
Stockton is one of a handful of municipal bankruptcy cases
playing out across the country that have shined a spotlight on
the strain of untenable pension obligations and other debts owed
by cities in distress. Stockton, along with larger cases in
Detroit and Puerto Rico, are being closely followed by the $3.7
trillion municipal bond market.
In Stockton's long-range financial plan, the city sets out
to amass strong cash reserves, along with contingency funding.
Moore argued that once the city reached a level of financial
health, all additional money would forever more filter into the
contingency reserves, instead of paying down the Franklin bonds.
But earlier in the week, a financial adviser for the city
had explained that the extra financial cushion was required for
"That's when you want to be most protected," said Robert
Leland, senior manager at the consulting firm Management
Partners and author of Stockton's long-range financial plan. He
added that there was already a "daunting array of needs that the
city has not funded."
On Tuesday, Stockton's case took a dramatic turn when U.S.
Bankruptcy Court Judge Christopher Klein announced his intention
to establish whether the country's largest pension fund,
Calpers, can be forced to share losses with other creditors in
The Northern California city of almost 300,000 has avoided
cutting its pension obligations to the California Public
Employees' Retirement System, fearing a $1.6 billion termination
fee and the risk of employee flight.
Moore said that loss of public employees had also been a
concern in Detroit, where U.S. Bankruptcy Court Judge Steven
Rhodes ruled in December that Detroit may legally reduce public
pension benefits, despite Michigan's constitutional protection
of public pensions.
"There was a strong belief that if anyone tried to touch
accrued benefits that all the employees would leave. We have not
seen that," said Moore, who provides operational restructuring
services to Detroit and has analyzed underfunded obligations of
Puerto Rico's pension system. "We've made sure we have a package
that is going to attract employees going forward."
Stockton's attorneys tried to discount Moore's testimony by
pointing out that he was not an actuary and had never worked for
a governmental agency.
On Tuesday, Stockton attorney Marc Levinson said if current
employees "take a haircut, they are gone."
The court also heard from Calpers Deputy Chief Actuary David
Lamoureux, who explained that Stockton's termination obligations
exceeds $2.6 billion with assets of only $1 billion. If the city
were to terminate its contract with the pension fund, Calpers
could reduce the pension benefits to all Stockton employees and
The only Californian city delinquent in pension payments in
excess of $150,000 is San Bernardino, which is currently in
mediation with Calpers.
(Reporting by Robin Respaut; Editing by Lisa Shumaker)