Stockton to Unveil Plan Including Cuts for Creditors

Stockton, California, is scheduled to unveil a bankruptcy exit plan today that may call for raising sales tax, cutting employee benefits and imposing cuts on creditors who are owed more than $350 million.

Should city officials approve the proposal as early as Oct. 3, it 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.

Creditors who may be targeted for cuts won’t be surprised by most of what they see, said Dale Ginter, a bankruptcy attorney who has been following the case.

“There have been a lot of negotiations leading up to this,” he said. Ginter represented retired city workers in the bankruptcy of Vallejo, California, which set legal precedents used in the Stockton case. “This may be a bit more like the throwing down of the gauntlet by the city” for further talks.

Since about April, Stockton has been in discussions with a group of bondholders and bond insurers, including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) Should those negotiations continue, each side will begin to focus on the legal strengths and weaknesses of the proposed plan of adjustment, Ginter said.

Stockton, an agricultural center of 296,000 about 80 miles (130 kilometers) east of San Francisco, is among four municipalities that have said they will ask creditors including bondholders to take less than the principal they are owed. The others are Detroit, San Bernardino, California, and Jefferson County, Alabama.

Broad Outlines

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.

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. 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, U.S. Bankruptcy Judge Christopher M. 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 a 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.

James O. Johnston, a bondholder attorney, declined to comment on the proposed plan.

The case is In re Stockton, 12-bk-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: Andrew Dunn at adunn8@bloomberg.net

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