Stockton can stay in bankruptcy over creditor objections

Stockton California

Stockton, Calif., can stay in bankruptcy protection after a judge said he found that the biggest U.S. city in bankruptcy negotiated in good faith with its creditors, and that the creditors didn't.

Creditors, including Assured Guaranty Corp. and Franklin Resources Inc., had argued that Stockton didn't qualify for bankruptcy because the city isn't truly insolvent, and that its leaders didn't negotiate a potential settlement in good faith.

Negotiation is a “two-way street,” said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn't negotiate in good faith. “You cannot negotiate with a stone wall.”

In the course of the hearing Monday, Mr. Klein also said that the city's witnesses were credible and that the city was “by any measure” insolvent when it filed for protection from creditors.

The city never held talks with the $254.9 billion California Public Employees' Retirement System, which provides retirement plans for city employees. The biggest U.S. public pension fund refused to negotiate with Stockton, claiming that under state law it isn't authorized to reduce the city's contributions to the fund. Mr. Klein said Monday that Stockton didn't have an obligation to negotiate with CalPERS.

The city is slated to stop paying for retiree health care on June 30 as part of a spending plan the City Council approved in June, citing a $417 million unfunded liability. The benefit had allowed workers employed as little as a month to receive city-paid health coverage for life, for both the employee and his or her spouse, Bob Deis, the city manager, said.

Stockton is among three municipalities that have said they'll try to force creditors, including bondholders, to take less than the principal they are owed. The other two are San Bernardino, Calif., and Jefferson County, Ala. No city or county since at least the 1930s has used the power of a U.S. bankruptcy court to force a reduction in its debt principal.