SAN FRANCISCO (Reuters) - Stockton, California said on Friday it had struck tentative deals opening the door to settlements with two major creditors, and putting the city at the “beginning of the end” of its bankruptcy case.
The deals also could avert a major court fight promised by the creditors, bond insurers that led opposition to Stockton’s bankruptcy and who had threatened to drag the state pension fund Calpers into their fight with the city.
In a draft of its plan for exiting bankruptcy, Stockton said it had the “outlines of a negotiated settlement” with bond insurer Assured Guaranty over $124.3 million in outstanding pension obligation bonds the city had targeted for losses.
The draft plan also disclosed a preliminary deal with bond insurer National Public Finance Guarantee over $45.1 million in outstanding lease revenue bonds for the city’s arena that had been in dispute.
The draft plan provided no details on the potential settlement with Assured and a spokesman for the bond insurer declined to comment. The draft said Assured executive management had not yet reviewed the deal.
“As this document was being finalized, the City was in negotiations with this creditor and had developed the outlines of a negotiated settlement,” the draft said.
It also said a preliminary term sheet agreement had been reached with National, along with agreements on other bonds insured by it relating to parking garages and a city building.
National spokesman Kevin Brown confirmed the deal to Reuters: “We’re pleased to have reached a settlement agreement with the City of Stockton that should expedite its exit from bankruptcy.”
The draft said Stockton is near the “final chapter” of bankruptcy, noting that “while we expect further intense negotiations and court hearings, with perhaps a set back here and there before this is over, this at least is the beginning of the end.”
National and Assured led efforts by Stockton’s so-called capital markets creditors to block the city’s bankruptcy case from moving forward, and they had insisted city pensions managed by Calpers be treated like other debt the city wanted to impair.
The U.S. municipal bond market has been watching Stockton’s bankruptcy case closely for more than a year as the city in California’s Central Valley had been aiming to force bondholders to swallow losses while leaving pensions untouched.
Alabama’s Jefferson County in its bankruptcy restructuring plan in June proposed losses for bondholders, becoming the first local government to do so since the 1930s.
Pension costs are a growing concern for the $3.7 trillion municipal debt market and National and Assured contested Stockton’s maintaining payments to Calpers, the California Public Employees’ Retirement System.
U.S. Bankruptcy Judge Christopher Klein in April found Stockton eligible for bankruptcy protection and said the showdown the insurers sought over payments to Calpers would have to wait until the city filed its plan for adjusting its debt to exit from bankruptcy.
Calpers, had been sidelined in Stockton’s bankruptcy proceedings but was ready to help defend its pension payments.
A spokeswoman for the $269 billion pension fund released a statement hinting at a truce with Stockton’s capital market creditors. “We are hopeful this proposed plan of adjustment will allow Stockton to regain its footing and continue to provide the essential services to its citizens,” the statement said.
Stockton’s draft plan said the city would keep paying into Calpers, noting it would “reform and reduce the costs of its pension program along with other post-employment benefits, but retain the basic Calpers pension which is crucial to the City’s ability to recruit and retain a quality workforce.”
Dale Ginter, a lawyer for Vallejo, California‘s, retired employees in that city’s bankruptcy, said he sensed exhaustion on the part of Stockton’s bond insurers: “People are probably tired. They’ve spent a lot of money on attorneys fees”.
Ginter also believes the bond insurers saw they may be better off cutting deals than continuing to contest pension payments in court when city employees and retirees had given up so much in concessions to help the city fix its finances.
“The employees and the retirees are taking a very big reduction in benefits,” said Ginter after reading through Stockton’s draft plan.
It projected Stockton’s general fund through fiscal 2049-2050 would save $659 million from pension reforms while ending medical benefits for retirees would save $812 million over the same period.
The timing for a clash with Stockton over its plan for adjusting its debt to exit bankruptcy also would have been problematic for the bond insurers.
Stockton’s city council recently put a measure to increase the city’s sales tax on the November ballot to in part help the city exit bankruptcy following its austerity measures.
With revenue tumbling as its housing market crashed, Stockton cut $90 million in spending from 2008 through last year to balance its budgets and slashed its work force. But early last year Stockton’s city council rejected deeper cuts due to concerns about public safety amid a spike in violent crime and it approved declaring bankruptcy.
Stockton’s city council will take up the draft on October 3 and the city could file a final plan with Klein early next month. With about 300,000 residents, Stockton was the most populous U.S. city to file for bankruptcy until Detroit filed in July.
Reporting by Jim Christie; additional reporting by Peter Henderson in San Francisco; Editing by Xavier Briand and Ken Wills