Wall Street creditors today sought to block the largest municipal bankruptcy in U.S. history, arguing in federal court that the city of Stockton improperly claimed insolvency while refusing to cut its massive pension obligations.
As U.S. Bankruptcy Judge Christopher Klein began a four-day trial in Sacramento to determine whether Stockton should be allowed to seek Chapter 9 municipal bankruptcy protection, fed up creditors ripped the city for wrongly sticking them with the bill for its fiscal ineptitude.
Creditors who insured Stockton's pensions and issued bonds for downtown redevelopment projects, including a sports arena and other improvements, charged that the city should have negotiated concessions in employee pension obligations to CalPERS to meet other payments.
While the creditors are seeking to stop bankruptcy for the city of more than 290,000, Stockton officials say the city could face financial chaos without bankruptcy protection.
Stockton, which slashed its bond payments and made deep cuts in its police department and other city staff amid an exploding fiscal deficit, contended that it was still required to keep up $29 million in annual payments to the state retirement system for employee pensions.
But that view, shared by CalPERS, was blistered in court today by Guy Neal, an attorney for Assured Guarantee Corporation, which had insured the city's pension bonds and issued bonds for an ill-fated purchase of an office building for a new city hall.
In his opening arguments, Neal argued that Stockton approved generous employee pensions while the city was in a real estate boom but then refused to renegotiate its obligations after the economy tanked and Stockton became ground zero for home foreclosures and the mortgage crisis.
"The city declines to address its single liability - unfunded pension costs," Neal said in his opening argument. "The city ignores the unfunded gorilla in the room. The city acted to put itself into
bankruptcy instead of making the hard decisions to put its fiscal house in order."
Attorney Marc Levinson, representing the city of Stockton, charged that the creditors' challenges to the city's bankruptcy filing last summer - including a charge that the city wasn't broke at the
time - were groundless. He also said the city is bound by its CalPERS obligations and "they know that."
"This is all about leverage," Levinson said of the creditors' claims. "It is about causing the city pain in an attempt to gain bargaining leverage. Nothing else makes sense. What good would
dismissal of Chapter 9 (bankruptcy) do for them? What good would it do for anyone?"
Levinson said the city had little choice but to declare bankruptcy after attempting to mediate its debts and slashing $90 million in city services over three years, including laying off 25
percent of the police force and more than 40 percent of employees in other city departments. The city also cut retiree health benefits - but not its pension obligations to CalPERS.
With the city's tax base collapsing amid the foreclosure crisis, Stockton last summer ended up surrendering a $48 million office building that was supposed to be for new city hall and new
downtown parking garages it built.
It claimed a $26 million budget shortfall in a $512 million city budget and annual deficits of $47 million projected within three years. Meanwhile, the city's bond rating was in junk status after a
disastrous investment in a CalPERS pension fund that was worth $100 million and stood to cost the city $248 million in payments.
Matthew Walsh, an attorney for National Public Finance Guarantee Corp., the lead bond issuer on Stockton's $68 million arena and other downtown improvements, charged that the city failed to
negotiate in good faith with its creditors. He said the city then wrongly filed for bankruptcy without exploring remedies such as increasing local taxes and making further cuts in city staff and services.
"The city's agenda was clear before the process began," Walsh said. "The city would restructure by targeting the creditors for disproportionate impairment."
Stockton City Manager Bob Deis, who was hired by the city to help navigate the fiscal crisis, was the first witness called in the trial. Deis was quickly grilled by Neal over his conclusions
that Stockton got into its financial mess because of employee pension and benefit perks that the new city manager had characterized as "eerily like a ponzi scheme."
"The city can't afford to pay CalPERS can it?" Neal asked.
"The city has to pay CalPERS," Deis answered, adding: "In order for us to be a viable employer, we're going to have to pay CalPERS."
Attorneys for CalPERS, which isn't challenging the Stockton bankruptcy, were in court as observers. "CalPERS is an interested party," said Michael Gearin, a lawyer for the state retirement system. "We're here to contain the spread of misinformation," he said.
Klein, who said he didn't expect to issue an immediate ruling in the case, said he would approve the Stockton bankruptcy petition if he finds that the city was, in fact, insolvent and negotiated in good faith to resolve its debts. But he said, "The city has the burden of proof."
"This is very much a preliminary hearing," the judge said, "much like a qualifying heat in a race or a sporting event that will very much determine if we are going to go forward in ultimately putting
forth a plan of adjustment" in bankruptcy.
Call The Bee's Peter Hecht, (916) 326-5539.