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Stockton Should Raise Taxes, Sell City Hall, Judge Told

The bankrupt city of Stockton, California, should raise taxes, cut employee benefits and close or sell city hall to repay bondholders, Assured Guaranty Corp. said in court papers.

The city could raise $9.6 million in taxes and save $24.4 million through cuts to services and labor costs, Assured said in a court filing made public today. The bond insurer is among a group of creditors trying to persuade a federal judge to dismiss Stockton’s Chapter 9 bankruptcy case and force the city to solve its financial problems outside of court protection.

Assured accused Stockton of ignoring budget options to justify filing bankruptcy and forcing bondholders and other creditors to take less than they are owed.

“A municipality cannot budget itself into insolvency to gain access to Chapter 9 or use Chapter 9 to harass or target certain groups of creditors,” Assured said in papers filed Dec. 14 in U.S. Bankruptcy Court in Sacramento, California.

The city and bondholders will be in court in February for a trial-like hearing over whether Stockton is legally entitled to remain in bankruptcy after elected officials sought court protection in June.

‘Specific Objections’

“The city looks forward to analyzing the specific objections and information,” Stockton said in a statement released Dec. 14. “We are not going to argue this in the media.”

Under Chapter 9 of the U.S. Bankruptcy Code, governments, unlike corporations, must first prove to a judge that they are eligible to be in bankruptcy before they can use the court process to try to cut debt through actions such as canceling contracts.

U.S. Bankruptcy Judge Christopher Klein will hear testimony about whether the city is insolvent as it claims, whether it negotiated with creditors in good faith before filing the bankruptcy petition, and whether the city followed California state law in seeking court protection.

Assured insured about $161 million in pension obligation bonds that the city says it cannot repay in full.

National Public Finance Guarantee Corp. also asked Klein to dismiss Stockton’s bankruptcy case, arguing that the city is unfairly forcing bondholders and other creditors to take excessive cuts. In its filing, the company repeated its argument that the city should force cuts on its biggest creditor, California Public Employees’ Retirement System.

The case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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