| SACRAMENTO, Calif., March 25
SACRAMENTO, Calif., March 25 Lawyers for
Stockton and its creditors began their court battle on Monday
over whether the California city may have bankruptcy protection
in a closely followed trial hinging on the city leaving pensions
intact while trying to force losses on bondholders.
As the biggest U.S. city to file for bankruptcy, the outcome
for Stockton will be an important test case for the $3.7
trillion U.S. municipal debt market. The hearing is expected to
last most of this week.
Stockton, along with Jefferson County in Alabama and smaller
San Bernardino, California, has said its bondholders will be
asked to take losses.
Since at least the 1930s no major city or county has forced
a reduction in the principal of its debt during a municipal
Lawyers for bondholders and insurers, which will have to
repay investors for any capital losses, argue the decision by
Stockton to not seek to impair its largest creditor, the
California Public Employees' Retirement System, shows a lack of
good faith - a reason that should block Stockton's request for
bankruptcy protection under federal bankruptcy law.
The retirement system, best known as Calpers, manages
pension accounts for Stockton's employees and retired employees.
"The city ignores the 800-pound pension gorilla in the
room," Guy Neal, one of the lawyers for the capital markets
creditors, said in his opening remarks.
Bond insurers contesting Stockton's eligibility for
bankruptcy protection have more than $300 million of exposure to
the city's debt.
Assured Guaranty Corp, Assured Guaranty Municipal Corp and
National Public Finance Guarantee Corp were joined by Wells
Fargo Bank, the Franklin California High Yield Municipal Fund
and Franklin High Yield Tax-Free Income Fund.
Marc Levinson, a lawyer for Stockton, defended the city's
right to go bankrupt. He argued Stockton had attempted to
negotiate in good faith with its creditors as required by
California law before demanding protection from creditors.
The city of 300,000 in California's Central Valley, which
filed for bankruptcy last year, fell on hard times when its
revenue plunged after its once-torrid housing market went bust.
Two decades of generous employee benefits, poor fiscal
management and too much debt also caught up with the city, which
is 85 miles east of San Francisco.
San Bernardino, which also filed for bankruptcy protection
last year, is not making contributions to the state's pension
fund as it contends with its financial troubles.
In other municipal bankruptcy cases, bondholders have been
Central Falls, a tiny, poor Rhode Island city, had its
bankruptcy plan approved by a judge in September. It slashed
retirees pension payments in half and raised taxes, but left
A Rhode Island law, passed as Central Falls' insolvency
reached a crisis point, gave bondholders a lien on property tax
The Central Falls case, along with sweeping public pension
changes at the state level, prompted labor unions and retirees
in other struggling Rhode Island cities - including Providence,
the state capital - to renegotiate retirement benefits and
collective bargaining agreements.
Though Central Falls has exited bankruptcy, its case will
remain open for several years so the court can step in if
elected officials veer from the restructuring plan. Officials
must provide quarterly statements about the city's financial
Because of the Central Falls case, "I don't think we're ever
going to need a Chapter 9 again" in Rhode Island, said Theodore
Orson at a distressed municipalities conference this month in
Providence. Orson was the attorney for the state-appointed
receiver who oversaw Central Falls' return from insolvency.