Reuters: Bankruptcy News: UPDATE 2-California's Stockton seen at brink of bankruptcy filing

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UPDATE 2-California's Stockton seen at brink of bankruptcy filing Jun 27th 2012, 00:17 Tue Jun 26, 2012 8:17pm EDT * Bankruptcy could be filed as soon as Wednesday * Stockton has $700 mln outstanding debt * Talks with 18 creditors ended Monday (Updates with information on creditors) By Jim Christie STOCKTON, Calif., June 26 (Reuters) - The northern California city of Stockton is poised on Tuesday to become the largest U.S. city to declare bankruptcy by approving a budget that requests protection from creditors. Stockton's predicament stems from years of fiscal mismanagement, too much debt taken on in good times and generous pay and benefits for city employees and retirees. After three months of talks to avert the bankruptcy concluded at midnight on Monday without results, Stockton's city council is meeting on Tuesday evening to vote on the new budget. As soon as Wednesday, the city manager could file for Chapter 9 for the San Francisco Bay-area community, home to 300,000. The council, due to meet soon, is widely expected to endorse the plan, said Dwane Milnes, who represented retired city employees in the talks. "It will be at least a 6-1 vote," he said. "Every signal in the universe points to them filing for bankruptcy either Wednesday or Thursday." Stockton, which has more than $700 million in debt, had been in confidential mediation with 18 creditors, seeking concessions to help fill a $26 million shortfall for the fiscal year beginning on July 1. The mediation was part of a restructuring plan for the city's battered finances unveiled in February. The $3.7 trillion municipal bond market has so far taken in stride Stockton's bankruptcy talks. Stockton has more than $700 million in bond debt. Bondholders and bond insurers are among its creditors. Stockton has suffered a plunge in revenue with the collapse of its once red-hot housing market, which transformed the city, traditionally a business center in California's farm-rich Central Valley, into a bedroom community of the San Francisco Bay area. Stockton has been unable to keep its budget balanced despite cutting more than $90 million in spending in recent years along with a quarter of all its employees, including a quarter of its police officers - a concern for the city's residents who are facing a surge in violent crime. A LANDMARK FOR U.S. MUNICIPAL DEBT MARKET If Stockton, 85 miles (about 135 km) east of San Francisco, files for bankruptcy, it would be the largest U.S. city to have ever done so, setting a landmark for the U.S. municipal debt market. Because municipal bankruptcies under Chapter 9 of the federal bankruptcy code are rare, especially for larger cities, Stockton could set important precedents on how various different types of creditors are treated in such cases. In the past, large cities such as Harrisburg, Pennsylvania, or Bridgeport, Connecticut, have seen the filing of bankruptcy protection rejected by the court. In the most recent case in October 2011, the filing by Harrisburg, a city of nearly 50,000, was rejected because a state law prohibited municipalities of a certain size from seeking legal protection from creditors. In California, lawyers representing Stockton also worked for Vallejo when it filed for bankruptcy in 2008. Vallejo, where the U.S. Navy established its first permanent base on the U.S. West Coast, emerged last year from bankruptcy with sharply reduced payments for its retiree medical program. At $4.23 billion, Alabama's Jefferson County last November set the record for the biggest municipal bankruptcy filing, which is still working its way through the court. Stockton officials have been considering bankruptcy since February. The 2013 budget plan, also known as a tendency plan, takes drastic action to plug the gaps. The plan proposes suspending $10.2 million in debt payments, a move likely to trigger further downgrades of the city by ratings agencies. Under the restructuring plan approved by its city council in February, Stockton has already defaulted on about $2 million in debt, allowing the trustee for one of its bond insurers to seize a building once slated to be its future city hall and three parking garages. The intentional default and of bankruptcy prompted Moody's Investors Service and Standard & Poor's Ratings Services to drop their credit ratings on Stockton. Moody's has its issuer rating for Stockton at a junk level Ba2 from Baa1 while S&P has its issuer rating on the city from BB to SD, one notch above its D default rating. Stockton's budget plan would also reduce spending on employee compensation and retiree benefits by $11.2 million. About $7 million in savings would come from cutting retiree health care benefits for one year and then phasing them out. (Reporting by Jim Christie, Editing by Tiziana Barghini and Lisa Shumaker) Link this Share this Digg this Email Reprints

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