Judge to rule Monday on whether to block Stockton city bankruptcy

Published: Thursday, Mar. 28, 2013 - 12:00 am | Page 1B
Last Modified: Sunday, Mar. 31, 2013 - 7:19 am

A bankruptcy judge said he will rule Monday on whether to block the Stockton bankruptcy on behalf of Wall Street creditors who claim they were stiffed on municipal bond payments as the beleaguered city protected employee pension obligations.

At the close of a three-day trial, bankruptcy Judge Christopher Klein heard sharply conflicting arguments Wednesday on whether to continue Stockton's protection as the largest city to declare bankruptcy in American history.

Klein said his ruling will come Monday after he makes an arduous review of thousands of pages in bankruptcy court affidavits and supporting documents from Stockton city officials and creditors.

"Much of the evidence over the last 2 1/2 days has been in written form," said Klein, who joked that he may end up spending Easter weekend "bench pressing 300 pounds" of documents in considering legal challenges to the Chapter 9 municipal bankruptcy of the city of more than 290,000 residents.

Creditors who insured Stockton's pensions and issued bonds for downtown redevelopment charged in court this week that the city wrongfully sought bankruptcy protection after bad-faith negotiations over its debts.

They want to force the city to negotiate with the California State Public Employees' Retirement System over Stockton's massive employee pension obligations – something the city says it can't do – to pay other obligations.

Matthew Walsh, attorney for National Public Finance Guarantee Corp., argued Wednesday that Stockton acted in bad faith when it sought "no concessions" from CalPERS obligations while refusing to negotiate with the creditor that issued bonds for the city's $68 million downtown arena.

CalPERS, which supports Stockton's bankruptcy bid, charged in court papers that Wall Street creditors were seeking "to bully the city into abandoning its provision of retirement benefits to its employees."

Norman Hile, an attorney for the city, argued Wednesday that Stockton needed bankruptcy protection because it had cut staff and police to the point where it couldn't provide "necessary services to protect the health and safety of its citizens."

The creditors argued that Stockton could have raised local taxes and made deeper fiscal cuts.

The tax issue flared in court a day after Stockton Mayor Anthony Silva announced Tuesday that he would pursue voter approval for a local sales tax increase to add 100 police officers – but not pay city creditors.

The last witness in the case, Stockton City Council member Kathy Miller, faced pointed questions by an attorney for Assured Guaranty Corp., which insured Stockton's pensions and issued bonds for its redevelopment.

Assured Guaranty lawyer Guy Neal seized upon Miller's public criticism of Silva's tax proposal.

The councilwoman had called the mayor's plan "half-baked" and said it "would send a mixed message to creditors who stand to lose millions."

Neal suggested Stockton officials had stubbornly resisted any tax increases before filing for bankruptcy protection last summer.

"In fact, these issues had never even been considered in a public session of the City Council?" he asked Miller.

"I don't believe so, no," answered Miller, who was first elected in 2008.

In a Stockton news conference Tuesday, Silva proposed a half-cent sales tax increase to bolster the ranks of Stockton's police force. Stockton cut its officer ranks 25 percent before its bankruptcy filing.

Silva steadfastly said money from the initiative wouldn't go for such things as downtown developments or paying off city bondholders.

"This money can only be used for public safety – no marinas, no city-funded restaurants," said Silva who was elected after the city bankruptcy filing. "By law, this money will go to where it was intended. The money cannot be grabbed by creditors."

From the witness stand, Miller said she was against the mayor's sales tax plan. If approved by voters, it would generate $18 million a year for local law enforcement before expiring in 2025.

"I don't believe that just increasing taxes is the answer to every problem," she said, suggesting that a sales tax initiative should broadly address major cuts in Stockton city services, not just police.

Miller was a key voice in presenting the city's bankruptcy plan to the public. She lambasted past Stockton officials for having overbet on a surge in tax revenue from a real estate boom while doling out generous pensions and health care benefits.

The city later became ground zero for the national mortgage and foreclosure crisis.

Despite slashing $90 million, Stockton last summer claimed a $26 million budget shortfall, with hundreds of millions of dollars in unfunded pension and health care obligations.

Call The Bee's Peter Hecht, (916) 326-5539.

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