Stockton, California, should be removed from bankruptcy court protection because it failed to negotiate in good faith with creditors and can’t form a viable debt-adjustment plan, a creditor said in court papers.
National Public Finance Guarantee Corp. challenged the validity of Stockton’s bankruptcy, arguing the city didn’t negotiate with the California Public Employees’ Retirement System, its largest unsecured creditor with a $147.5 million claim, according to a filing yesterday in U.S. bankruptcy court in Sacramento, California.
The bond insurer said Stockton’s proposal to reduce debt unfairly places the burden on debt holders without forcing Calpers to make concessions and still leaves the city insolvent over the long term. National insures about $93.8 million in bonds issued by the city.
“Despite the city’s massive Calpers liability, the city did not even ask for any reductions from Calpers, which is the very liability that the city blames for its financial situation,” National said in the filing.
Connie Cochran, a spokeswoman for Stockton, said the city “is not in a position to address specific objections” to the plan because the objection deadline hasn’t passed.
The issue raised in yesterday’s filing doesn’t account for spending cuts already made by the city or its civic obligations to citizens, she said today in an e-mailed statement.
In the past four years, the city has reduced programs and services, cut the police force by 25 percent, fire personnel by 30 percent and reduced the number of other employees by 43 percent, Cochran said.
Employees’ pay has been cut by at least 9 percent and as much as 23 percent, while workers have begun paying a portion of their retirement, according to the city’s statement. Stockton addressed post-retirement benefits by reducing city-paid healthcare premiums for retirees this year and eliminating city- paid premiums next year.
National claims Stockton’s debt adjustment proposal isn’t feasible, and the city has admitted it won’t be a panacea for its debt.
Stockton “projects a total deficit under its own plan and over its own projection period of nearly $100 million,” National said.
Even if all concessions in Stockton’s proposal are achieved, “the failure of the city to propose any adjustment to its Calpers liability results, in the city’s own forecasts, in an annual deficit starting as early as 2013-14 of over $5 million,” growing to more than $17 million a year by 2020-21, National said.
“Calpers participated in the mediation process and will work within the legal system to reach resolution of these difficult issues,” Brad Pacheco, a spokesman for Calpers, said in an e-mailed statement.
The pension fund, the largest in the U.S., gave information and assistance to the city during the bankruptcy process and remains “committed to safeguarding the constitutionally protected pension benefits of the city’s employees and retirees,” he said.
Stockton is trying to become the first American city since the Great Depression to use bankruptcy to force bondholders to take less than the principal they’re owed. The city will need approval from the judge to impose any cuts on creditors.
The city of 292,000, a river port about 80 miles (130 kilometers) east of San Francisco, listed assets of more than $1 billion and debt of more than $500 million in its bankruptcy petition.
Stockton filed a Chapter 9 bankruptcy on June 28 after months of talks failed with creditors, including Assured Guaranty Corp. (AGO) and labor officials. Assured’s claims should be treated the same as those of other creditors, including any filed by employees, the bond insurer said in an Aug. 1 statement.
“Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another,” according to the statement.
The bankruptcy case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).