By Ed Mendel
Monday, September 30, 2013

Chances of the Stockton bankruptcy producing a landmark ruling to cut pensions dimmed last week, when the city announced a deal with one bond insurer and a tentative deal with another one.

The two big bond insurers, who unsuccessfully opposed Stockton’s eligibility for bankruptcy, argued that a city plan to cut bond debt was unfair because the largest creditor, CalPERS, would be untouched.

U.S. Bankruptcy Judge Christopher Klein said the proper time to rule on the CalPERS question is when the court considers whether all creditors are being treated fairly by the city “plan of adjustment” to cut debt and emerge from bankruptcy.

Now Stockton may be taking big steps toward resolving the fairness issue by negotiating a plan with creditors to exit bankruptcy as urged by the judge. Klein brought in another bankruptcy judge, Elizabeth Perris, to conduct mediation.

A debt-cutting plan proposed by Stockton last week cited a tentative agreement with National Public Finance Guarantee, backer of $89 million in bonds, and a draft agreement awaiting approval by Assured Guarantee, backing $164 million in bonds.

The Stockton city manager, Bob Deis, said the city has agreements with 14 of 19 major creditors. He said a “cram down” approach, which imposes debt cuts opposed by creditors, will not occur until a court order is obtained.

Deis said the proposed plan of adjustment, scheduled for a City Council vote Thursday, is the first step in a complicated process that could, in six months, get Stockton out of the bankruptcy declared June 28 last year.

“While we expect further intense negotiations and court hearings, with perhaps a set back here and there before this is over, this at least is the beginning of the end,” Deis wrote in the plan. “It provides the final piece in our road back to putting our financial house in order.”

One of the remaining hurdles is getting voter approval of a ¾-cent sales tax on Nov. 5. The plan said the alternative to Measure A is $11 million in additional “brutal” spending cuts and the loss of “negotiating room to cut deals with our creditors.”

The Stockton bankruptcy has been widely watched because of speculation that public pensions, protected against cuts by state court decisions based on contract law, might be reduced in federal bankruptcy court like other contract debt.

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