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 economic downswings.
"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 Chapter 9.
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 retirees.
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)