Judge Gives Stockton, Calif., Bankruptcy Relief

SACRAMENTO, Calif. (CN) - A federal judge ordered relief under Chapter 9 for the bankrupt city of Stockton, Calif., a worrisome development for bondholders and the California Public Retirement System.

Unable to meet its $700 million bond debt and $26 million budget shortfall, Stockton had petitioned for bankruptcy protection and adjustments under Chapter 9 in June 2012.

Shortly thereafter the city adopted a new budge that sought to cut costs by reducing retiree health benefits, drawing ire from the Association of Retired Employees of the City of Stockton.

On Aug. 6, U.S. Bankruptcy Judge Christopher Klein refused to issue a restraining order or injunction.

At the conclusion of a three-day trial on Monday, Klein reportedly said that Stockton's bond market creditors had failed to support claims that the city did not negotiate in good faith or filed its petition while solvent.

Klein rebuked this notion while delivering his one-hour opinion.

"It makes no sense to think the city is playing some kind of game to target the capital market creditors," Klein said, according to an article from the Bond Buyer. "I reject that the city artificially crafted this situation."

Klein also noted how Stockton began cost-cutting measures years earlier, and he said it was not an option to make further cuts to already diminished police and fire services, Reuters reported.

During a press conference after the ruling, City Manager Bob Deis said that the "scorched-earth litigation strategy" of the bond firms fighting eligibility cost the Stockton up to $5 million, as well as time that could have been better spent working on debt solution, the Bond Buyer reported.

The ruling makes Stockton, pop. 300,000, the largest city ever to file for bankruptcy protection.

Its creditors include the California Public Retirement System, bond investors and its insurers - National Public Finance Guarantee, Wells Fargo National Association, Assured Guaranty Corporation, Bank of America and Union Bank.

With bankruptcy relief on the way for Stockton, the court must next confirmi the city's plan of debt adjustment and ensure implementation of the plan.

"The day of reckoning will be the day of plan confirmation," Klein said, according to the Bond Buyer.

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