| June 4
June 4 In the final day of a trial to determine
if Stockton, California, is ready to end its two-year pilgrimage
through Chapter 9 bankruptcy protection, the city argued its
plan to handle its liabilities to creditors, public workers and
the state's pension fund was fair and equitable.
The trial's proceedings on Wednesday, plus the four days of
hearings in May, mainly focused on the Northern California
city's holdout creditor - two funds managed by Franklin
Templeton Investments - which the city has proposed to offer
less than a penny on the dollar.
But the $3.7 trillion municipal bond market is closely
watching this trial for an additional reason: to see how the
court handles the treatment of pension obligations, which the
city has proposed to leave untouched.
Last month, U.S. Bankruptcy Court Judge Christopher Klein
said he would venture into largely untrodden territory to
determine whether the country's largest pension fund, the
California Public Employees' Retirement System, could be forced
to take a loss as other creditors do in municipal bankruptcies.
On Wednesday, the city, its retirees and Calpers presented a
united front in urging the judge to leave pension obligations
alone in his ruling.
"The bottom line is this: The city has made a business
judgment to honor its Calpers commitment," said Stockton
attorney Norman Hile. "If Calpers were to terminate the city's
contract, the city could not possibility pay that enormous
Calpers has calculated that if Stockton's contract with the
$285.2 billion pension fund were to end, Stockton would face an
unprecedented $1.6 billion termination fee. It would also ensure
that "the parties in this case are involved in expensive
litigation," said Calpers attorney Michael Gearin. "I think that
would be unfortunate."
Facing a severe haircut on its $35 million loan, Franklin
described Stockton's plan in closing arguments as a "true
hardball cramdown" in which the city decided "to forgo its one
opportunity to adjust pension liability and actually do
something about the problem that put it in this bankruptcy case
in the first place," said James Johnston, attorney for Franklin.
Franklin's attorneys also argued the city had proposed an
overly conservative long-range financial plan that built up
reserve funds while leaving "nothing left over for Franklin."
Judge Klein's first step in ruling on Stockton's proposed
"exit plan" is scheduled for July 8, when he expects to address
the city's valuation of Franklin's collateral, including two
golf courses and a park.
The city has argued that the collateral is worthless, in
part because the golf courses lost $3 million over the past six
years and require millions more in repairs. Franklin's attorneys
tried to debunk that idea during the hearing in May with an
expert witness who said the golf courses could be sold at a
(Reporting By Robin Respaut; Editing by Ken Wills)