Stockton, Calif. has unveiled its plan to exit bankruptcy by adjusting unsecured debt.
The proposal is scheduled to go before the city council for a vote on Oct. 3, city spokeswoman Connie Cochran said. With the council’s approval, the plan would be submitted to the federal judge in Sacramento overseeing the bankruptcy, Stockton’s lead bankruptcy attorney, Marc A. Levinson, said in an e-mail.
Once the plan is in front of Bankruptcy Judge Christopher M. Klein, creditors and the city may continue negotiating any points they don’t agree on, said Dale Ginter, a bankruptcy attorney who has been following the case.
“This may be a bit more like the throwing down of the gauntlet by the city,” he said. Ginter represented retired city workers in the bankruptcy of Vallejo, Calif., which set legal precedents used in the Stockton case.
Creditors who may be targeted for cuts won’t be surprised by most of what they see, Ginter said
“There have been a lot of negotiations leading up to this,” he said.
Since about April, Stockton has been in discussions with a group of bondholders and bond insurers, including Assured Guaranty Corp. and Franklin Resources Inc. If negotiations continue, each side will begin to focus on the legal strengths and weaknesses of the proposed plan of adjustment, Ginter said.
Stockton has refused to impose a reduction on what it owes the California Public Employees’ Retirement System, or Calpers, which provides pensions to its employees.
“Stockton’s proposed plan of adjustment reflects the difficult financial decisions the city has had to make in order to restore its financial health,” Calpers said today in a statement. “By continuing to fully fund its pension obligations, Stockton has both acted in accordance with applicable constitutional and statutory law and acknowledged the importance of a secure retirement to its current employees and retirees.”
That position was challenged by bondholders and bond insurers, who tried to have the city thrown out of bankruptcy earlier this year.
In denying that request, Klein said the dispute over whether Calpers should also take a cut could be brought back as part of a potential court fight over a proposed plan of adjustment.
Bondholders may try to convince Klein that the proposal should be rejected because it can’t meet the test set out in the U.S. Bankruptcy Code that requires that a plan be fair and equitable and not discriminate against creditors unfairly, Ginter said.
Stockton, an agricultural center of 296,000 about 80 miles east of San Francisco, is among at least three municipalities that have said they will ask creditors including bondholders to take less than the principal they are owed. The others are Detroit and Jefferson County, Alabama.
Since filing for bankruptcy last year, Stockton has revealed the broad outlines of its strategy in court documents, court hearings and public statements. Elected officials put a 0.75 cent sales-tax increase on the November ballot to fund police services and help the city exit bankruptcy, and they have negotiated concessions with current and former city employees. Before the city filed for bankruptcy, officials asked creditors to accept less than they are owed.
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