By Jim Christie and Peter Henderson
SAN FRANCISCO, July 20 (Reuters) – Stockton, California, the
largest U.S. city to file for bankruptcy, never came close to
striking deals with key creditors in talks before it sought
court protection, the city disclosed on Friday in documents
illustrating its stark choices.
The city’s bond insurers snubbed proposals from managers of
the city of nearly 300,000 in California’s Central Valley, where
crime and unemployment have soared as the housing market fell.
Retired city employees and fire and police unions over three
months made some headway, but in the end the only tentative
deals were with six other unions.
The city is trying to convince a federal bankruptcy judge to
give it Chapter 9 protection from creditors. Initial proposals
included ending health care for retirees, suspending payments on
much of its debt for five years and draconian cuts of payments
on $124.3 million of pension obligation bonds.
The city faces a $26 million shortfall in the current fiscal
year, when its main budget, or General Fund, revenues are
projected to be $155 million. It has cut $90 million in General
Fund spending in the last three years.
Stockton’s future may be a roadmap for other troubled
California cities. Los Angeles-area’s San Bernardino is
preparing to file for bankruptcy and Compton may do so later in
the year. Stockton’s case will test how far courts are willing
to let cities cut retiree benefits.
Stockton became an outpost of the San Francisco Bay Area, 80
miles away, when the housing market boomed, and the town began
to spend like a big city, building a new sports complex,
redeveloping its riverfront and buying a new town hall.
The development is a money-loser, the town hall has been
taken over by a creditor, and the mainstay of city finances –
property taxes – has dried up; housing prices more than tripled
in the first half of the last decade but faded back to 2000
levels in 2009.
The roughly 800 pages of proposals and records of meetings
over three months that the city presented on Friday are its
evidence that it negotiated in good faith and cannot afford to
pay its debts.
City Manager Bob Deis in an open letter accompanying the
papers said the city could not cut services any more. “The City
ranks at the top in violent crime and at the bottom in police
officer staffing levels among major cities in the country. It
has some of the busiest fire stations in the country,” he wrote.
The proposals disclosed on Friday evening are months old,
but the city sets the agenda in Chapter 9 talks. Its proposal to
end health care coverage for retirees is already the subject of
a related case, which has a hearing set for Monday.
Assured Guaranty, the insurer on the pension bonds, has
scorned Stockton’s efforts, arguing the city made no real
attempt to raise revenue or cut pensions. City documents showed
Assured, National Public Finance Guarantee Corp and bondholder
trustee Wells Fargo Bank NA, which has repossessed three
of Stockton’s parking garages and the building slated to be city
hall, did not counter Stockton’s offers.
National Public Finance Guarantee Corp, a wholly owned
subsidiary of MBIA Inc, has about $224 million of
exposure to Stockton, including $89 million backed by the city’s
General Fund.
Assured Guaranty disputes whether Stockton should be
in bankruptcy court and has said it intends to “vigorously
enforce” its rights as a creditor in Chapter 9 proceedings,
including its right to contest the city’s eligibility for
bankruptcy and any plan of adjustment it considers unfair.
Assured Guaranty has $161.4 million of exposure to Stockton
debt, including just over $121 million of exposure to the city’s
pension obligation bonds.
“Many other cities across the country are experiencing
similar financial challenges, but they (and their respective
voters) have responsibly chosen to make the difficult decisions
rather than choosing bankruptcy,” Assured wrote in a June 29
statement.
City manager Deis told the Stockton Record at the time:
“They (Assured) literally want anarchy in the streets.”
