March 27, 2012 / 10:56 PM / 6 years ago

Former bankruptcy judge tapped as Stockton mediator

SAN FRANCISCO, March 27 (Reuters) - A former U.S. bankruptcy court judge will oversee negotiations between Stockton, California, and its creditors that may help the city avoid having to file for bankruptcy, a spokeswoman said on Tuesday.

Ralph Mabey, senior counsel with the Los Angeles law firm of Stutman Treister & Glatt, was selected as mediator by Stockton officials and those invited to the negotiations, which will be confidential, the city’s spokeswoman said in a statement.

Mabey served as a U.S. bankruptcy judge from 1979-83 and then founded LeBoeuf, Lamb, Greene & MacRae, the international bankruptcy practice now known as Dewey & LeBoeuf llp.

Stockton’s spokeswoman last week said the following will join mediation along with city bargaining units and a group representing retired city workers: Assured Guaranty; the California Public Employees’ Retirement System; Dexia Credit Local, New York branch; Franklin Advisers Inc; National Public Finance Guarantee Corp; Union Bank; the U.S. Department of Housing and Urban Development, and Wells Fargo & Co.

Mediation, which may last up to 90 days, is required under a state law approved after Vallejo, California’s 2008 bankruptcy and is intended to give local governments with severe financial distress an opportunity to seek concessions to shore up their budgets.

If Stockton is unable to win sufficient concessions, it could still file for Chapter 9 bankruptcy. If the city of 292,000 people located about 85 miles east of San Francisco does declare bankruptcy, it will become the biggest U.S. city ever to do so.

Stockton’s city council last month endorsed a financial restructuring plan that includes mediation and, to the dismay of many in the U.S. municipal debt market, defaulting on about $2 million in debt payments during the remainder of the current fiscal year through June.

Separately on Tuesday, Moody’s Investors Service cut its credit ratings on about $341 million of Stockton’s debt, including its pension obligation bonds, citing concerns the city may default as it heads into mediation.

Moody’s lowered Stockton’s 2007 pension obligation bonds to B3 from B1 and the city’s 2006 lease revenue refunding bonds to Caa1 from B2 and said the city’s long-term ratings remain under review for further downgrades.

Moody’s also affirmed Stockton’s Ba2 issuer rating. The rating agency lowered the rating to that speculative-grade level last month after Stockton’s city manager said he would urge the city council to suspend some debt payments.

Stockton faces a budget gap in the range of $20 million to $38 million, the result of a steep plunge in revenues due to a severe local housing slump.

According to Stockton’s city manager, the city’s finances are also at the breaking point due to two decades of fiscal mismanagement by city officials and because the city took on too much debt and provided overly generous pay and benefits for municipal employees and retirees. (Reporting by Jim Christie, Editing by Gary Crosse)

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