Stockton Deficits May Total $100 Million, Forecast Shows

Stockton, California’s annual budget deficits may total almost $100 million after 10 years even if it got all of the cuts it sought before filing for bankruptcy, a city forecast showed.

The forecast assumes the city would take no additional actions, which is unrealistic, David Millican, a management consultant for the city, testified today in Sacramento. U.S. Bankruptcy Judge Christopher M. Klein is presiding over a hearing to decide whether Stockton is eligible to remain in bankruptcy, where it is shielded from paying many of its debts.

Guy Neal, an attorney for creditors opposed to the bankruptcy, cross-examined Millican about the forecast in an effort to bolster the argument that Stockton should be denied court protection. Annual deficits under the forecast would start at $700,000 and climb to $17.6 million in 2021, Neal said. The deficits would add up to $99.8 million after 10 years.

“The 10-year projections in and of themselves do not show the city achieving financial stability within 10 years?” Neal asked.

“That’s correct,” Millican said. “Not without further action.”

Creditors such as Assured Guaranty Corp., a bond insurer, and Franklin Resources Inc. (BEN), a mutual-fund manager, are trying to prove at the three-day trial that began yesterday that the city isn’t truly insolvent and didn’t engage in good faith negotiations.

Raising Taxes

Yesterday, Neal, who represents Assured, said that the city refused to take steps, such as raising taxes or demanding that highly paid city employees return past wages, that could help balance its budget. Assured argued in court papers that the city manipulated its budget to appear to be insolvent.

Stockton is among three municipalities that have said they will try to force creditors, including bondholders, to take less than the principal they are owed. Bondholders have complained for months about the city’s plan to cut their debt while maintaining tens of millions of dollars in future pension payment to the California Public Employees’ Retirement System, or Calpers.

If Stockton’s creditors win at trial, they will be free to sue the city of 300,000 in state court, where it’s easier to force asset sales, cuts in city services or a boost in revenue to pay debt. While in bankruptcy, Stockton, located 80 miles (129 kilometers) east of San Francisco, is shielded from such tactics and has more power to choose which bills to pay.

Debt Plan

A trial victory by Stockton would allow the city to pursue its original debt-reduction plan. Before filing for bankruptcy in June under Chapter 9 of the U.S. Bankruptcy Code, the city asked bondholders and other lenders owed more than $300 million to take less than full repayment.

In his testimony, Millican said 10-year forecasts often show long-range deficits and are useful for clarifying the options faced by a city council.

“You’d never reach that because you’d have to take action to make sure that the debt didn’t accumulate,” said Millican, a former city official who is now a consultant with Management Partners.

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; Jared Goyette in U.S. Bankruptcy Court in Sacramento

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

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