Bankrupt Stockton Plan Favors Retirees Over Creditors

Stockton, California, unveiled its plan to exit bankruptcy by raising taxes and paying some creditors less than they are owed while maintaining its pension obligations to city employees.

Under the proposed plan of adjustment posted yesterday on Stockton’s website, bondholder Franklin Resources Inc. (BEN) would have the option of settling with the city or taking control of a park and two golf courses that were pledged as collateral for $35.1 million the company is owed. The city says it can only pay $500,000 of the $2.9 million it owes every year on the bonds.

Stockton has “the outlines of a negotiated settlement” with creditor Assured Guaranty Corp., which insured $164.7 million in bonds that the city has said in the past it cannot fully repay. City officials didn’t disclose what it offered the bond insurer, saying in a staff report to the Stockton city council that they wanted to keep the details confidential until at least Sept. 30, when Assured may present the proposal to the company’s senior executives.

“This may be a bit more like the throwing down of the gauntlet by the city,” Dale Ginter, an attorney who has been following the case, said before the plan was unveiled. Ginter represented retired city workers in the bankruptcy of Vallejo, California, which set legal precedents used in Stockton.

Creditor Cuts

Creditors 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.

The proposal is scheduled to go before the 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.

In addition to cutting some debt, the plan also relies on voters approving a sales-tax increase in November that would raise about $28 million annually. If voters reject the increase, the city would have to cut $11 million from services, according to the staff report. Before the bankruptcy, Stockton reduced services and cut employees, including police officers.

Once the plan is in front of U.S. Bankruptcy Judge Christopher M. Klein, creditors and the city may continue negotiating any points they don’t agree on, Ginter said.

Bond Insurers

Since about April, Stockton has been in discussions with a group of bondholders and bond insurers, including Assured and Franklin.

By August, creditors had claimed they were owed more than $1.18 billion, according to a draft of the disclosure statement, which explains the plan for creditors. The statement was attached to the city council agenda for Oct. 3.

The city said it will dispute some of those claims.

Although Stockton pledged to keep up all payments to its employee pensions, retirees will lose a subsidy for their health insurance under a settlement announced earlier this year. In June, Stockton said it would give retirees $5.1 million in exchange for canceling that benefit, or about 1 percent of $538 million that retirees may have been owed.

Holders of all other general unsecured claims would recover the same percentage, according to the draft plan. The plan involves claims of about $299 million of publicly held securities, according to the draft.

Calpers Maintained

Stockton didn’t impose a reduction on what it owes the California Public Employees’ Retirement System, or Calpers, which provides pensions to its workers.

“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 yesterday 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.”

The pension commitment had been challenged by bondholders and bond insurers, who tried to have the city thrown out of bankruptcy.

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 the proposed plan of adjustment.

Bankruptcy Code

Bondholders may try to convince Klein that the proposal should be rejected because it doesn’t comply with the U.S. Bankruptcy Code, which 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 (130 kilometers) 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 had revealed the broad outlines of its strategy in court documents, court hearings and public statements. Elected officials put the 0.75 cent sales-tax increase on the November ballot and negotiated concessions with current and former city employees. Before the city filed for bankruptcy, officials asked creditors to accept less than they are owed.

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

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Andrew Dunn at adunn8@bloomberg.net

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