What's behind the Stockton, CA bankruptcy?

Last July, Stockton, CA became the largest US city ever to file for bankruptcy. It was being choked to death by pension and health care costs after a series of bad investments in mortgage backed securities blew up during the housing meltdown.

But some bond insurers are saying, "Not so fast." These companies stand to lose a bundle in any restructing and are accusing Stockton of misusing the municipal bankruptcy laws.

UPI:

"The agenda is clear," lawyer Jeffrey Bjork wrote on behalf of the Assured Guaranty Ltd. bond insurer, one of the largest creditors that helped the city refinance pension debt.

"The city hopes to use the Chapter 9 plan process to impose permanent impairment, and to cram down a non-consensual plan, on capital-market creditors," he wrote.

Bjork called Stockton's July 2012 declaration of Chapter 9 bankruptcy an improper use of the U.S. Bankruptcy Code and asked U.S. Bankruptcy Judge Christopher M. Klein in Sacramento to throw out Stockton's case, arguing the city of 300,000 is solvent.

Other creditors making similar arguments include two mutual funds managed by Franklin Advisers Inc., bond trustee Wells Fargo Bank NA and bond insurer National Public Finance Guarantee Corp.

Chapter 9 lets municipalities restructure their debts, the way Chapter 11 does for businesses.

Stockton became the largest U.S. city to file for the protection after suffering one of the nation's biggest hits when the mortgage bubble burst five years ago.

It has since slashed tens of millions of dollars in city services -- including firefighters and programs for at-risk children -- and said it would cut its municipal bond repayments to a level The New York Times said was never seen before in a municipal bankruptcy.

But it has refused to touch current workers' pension accruals or cut benefits retirees now receive.

That is why the mutual funds that hold the threatened bonds, and insurers that guarantee them, are suing, the Times said.

They cite a bankruptcy principle that says similar classes of creditors must be treated the same way, so workers' pensions should also be affected by the bankruptcy filing.

One of the first questions Klein must answer is whether Stockton qualifies for Chapter 9 at all, the Times said.

Restructuring its bond holdings so that it can continue to fund pension and health benefits for the workers doesn't seem rational. And some of the tactics they are accused of employing are troubling:

The creditors are focusing on two of the tests, insolvency and good faith negotiations.

Assured, based in Hamilton, Bermuda, argued in court papers that the city, in an effort to become insolvent, manipulated its budget process by refusing to raise taxes and limiting service cuts.

The insurer would be on the hook for tens of millions of dollars in bond payments if the city wins permission to eliminate the debt.

On the good faith test, creditors led by Assured and the other bond insurer in the case, MBIA Inc. (MBI) unit National Public Finance Guarantee Corp., claim the city wasn't serious about striking a deal during months of pre-bankruptcy talks required by California law.

Franklin's subsidiary, Franklin High Yield Municipal Fund, and Wells Fargo Bank NA filed court papers saying they support the objections of Assured and National Public Finance.

It's hard to prove intent, but it appears that Stockton's creditors at least have a shot of winning. If that happens, those workers' pension and health insurance benefits will almost certainly be in line for trimming.




Last July, Stockton, CA became the largest US city ever to file for bankruptcy. It was being choked to death by pension and health care costs after a series of bad investments in mortgage backed securities blew up during the housing meltdown.

But some bond insurers are saying, "Not so fast." These companies stand to lose a bundle in any restructing and are accusing Stockton of misusing the municipal bankruptcy laws.

UPI:

"The agenda is clear," lawyer Jeffrey Bjork wrote on behalf of the Assured Guaranty Ltd. bond insurer, one of the largest creditors that helped the city refinance pension debt.

"The city hopes to use the Chapter 9 plan process to impose permanent impairment, and to cram down a non-consensual plan, on capital-market creditors," he wrote.

Bjork called Stockton's July 2012 declaration of Chapter 9 bankruptcy an improper use of the U.S. Bankruptcy Code and asked U.S. Bankruptcy Judge Christopher M. Klein in Sacramento to throw out Stockton's case, arguing the city of 300,000 is solvent.

Other creditors making similar arguments include two mutual funds managed by Franklin Advisers Inc., bond trustee Wells Fargo Bank NA and bond insurer National Public Finance Guarantee Corp.

Chapter 9 lets municipalities restructure their debts, the way Chapter 11 does for businesses.

Stockton became the largest U.S. city to file for the protection after suffering one of the nation's biggest hits when the mortgage bubble burst five years ago.

It has since slashed tens of millions of dollars in city services -- including firefighters and programs for at-risk children -- and said it would cut its municipal bond repayments to a level The New York Times said was never seen before in a municipal bankruptcy.

But it has refused to touch current workers' pension accruals or cut benefits retirees now receive.

That is why the mutual funds that hold the threatened bonds, and insurers that guarantee them, are suing, the Times said.

They cite a bankruptcy principle that says similar classes of creditors must be treated the same way, so workers' pensions should also be affected by the bankruptcy filing.

One of the first questions Klein must answer is whether Stockton qualifies for Chapter 9 at all, the Times said.

Restructuring its bond holdings so that it can continue to fund pension and health benefits for the workers doesn't seem rational. And some of the tactics they are accused of employing are troubling:

The creditors are focusing on two of the tests, insolvency and good faith negotiations.

Assured, based in Hamilton, Bermuda, argued in court papers that the city, in an effort to become insolvent, manipulated its budget process by refusing to raise taxes and limiting service cuts.

The insurer would be on the hook for tens of millions of dollars in bond payments if the city wins permission to eliminate the debt.

On the good faith test, creditors led by Assured and the other bond insurer in the case, MBIA Inc. (MBI) unit National Public Finance Guarantee Corp., claim the city wasn't serious about striking a deal during months of pre-bankruptcy talks required by California law.

Franklin's subsidiary, Franklin High Yield Municipal Fund, and Wells Fargo Bank NA filed court papers saying they support the objections of Assured and National Public Finance.

It's hard to prove intent, but it appears that Stockton's creditors at least have a shot of winning. If that happens, those workers' pension and health insurance benefits will almost certainly be in line for trimming.




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