Reuters: Bankruptcy News: Stockton, Calif. mayor hopeful of deal with creditors

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Stockton, Calif. mayor hopeful of deal with creditors May 17th 2012, 23:08 SAN FRANCISCO | Thu May 17, 2012 7:08pm EDT SAN FRANCISCO May 17 (Reuters) - Stockton, California officials are hopeful of a settlement with their financially troubled city's creditors to avoid a municipal bankruptcy filing, Mayor Ann Johnston said on Thursday a few days after the city manager projected a larger city budget gap. "Avoiding that is our goal," Johnston said, referring to a potential bankruptcy filing that has been under discussion in recent months in Stockton's City Hall. Johnston made her remarks during a state of the city speech webcast by The Record newspaper in Stockton, a city of 292,000 people 85 east of San Francisco. Mediation between Stockton and its creditors could wrap up at the end of this month unless a majority of the parties in the talks request an extension. Stockton is the first big city in California to test a new law requiring mediation after its leaders in February endorsed a restructuring plan for the city's finances. The law requiring mediation was approved in response to Vallejo, California's controversial bankruptcy filing in 2008. Vallejo emerged from bankruptcy last year. Stockton's restructuring plan includes mediation and, to the shock of many in the U.S. municipal debt market, defaulting on some debt payments during the remainder of the current fiscal year through June. Rating agencies have slashed Stockton's credit rating in response. State Controller John Chiang's office is investigating the city's financial practices. City officials have said sloppy bookkeeping contributed to Stockton's financial troubles along with a severe slump in revenue, state raids on the city's coffers, taking too much debt and providing city workers with high pay and generous benefits in retirement. Mediation is confidential so city officials and parties on the other side of the negotiating table - including bond insurers and groups representing city employees and retired city workers - will not comment on the talks. Ralph Mabey, senior counsel with the Los Angeles law firm of Stutman Treister & Glatt, was selected in late March as mediator. Mabey is a former U.S. bankruptcy court judge and mediator in the Lehman Brothers Chapter 11 bankruptcy case. Johnston's speech followed a budget message earlier this week to Stockton's city council from its city manager that included a revised estimate for the city's general fund deficit. It is now projected to be in the range of $26 million to $43 million, compared with a prior estimate of a deficit in the range of $20 million and $38 million. Stockton's economy has been hit hard by the housing market's steep downturn in inland California, slashing the city's revenue. Johnston noted that only 150 new homes were built in the city last year compared with 3,000 in 2007 and that the city has cut $90 million in spending over the last three years. The jobless rate for Stockton and surrounding San Joaquin County stood at 16.7 percent in March. Stockton faces three painful options to close its budget gap, the city manager's message said. The first is to balance the city's books with spending cuts deeper than those previously proposed. But "The 'all cuts' budget balancing strategy would cripple and endanger the City and its citizens," the message said. The second option is to win concessions during mediation that reduces Stockton's spending levels, the message said. If Stockton does not notch sufficient concessions, it could still file for bankruptcy. The third option, and last resort, a budget that defines spending levels in Chapter 9 bankruptcy proceedings. (Reporting By Jim Christie; Editing by Andrew Hay) Link this Share this Digg this Email Reprints

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