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WALTERS: How Stockton may have hurt its own case

Stockton's high-profile municipal bankruptcy is obviously a complex legal proceeding, but at its core it's a relatively simple conflict.

The city claims that it lacks the funds to both provide vital services and service many millions of dollars in loans it had taken out. The bonds financed city employee pensions and built new public facilities, including two sports venues.

Bondholders and bond insurers contend that the city has not tried hard enough to trim its other outgoes, particularly its payments to the California Public Employees' Retirement System and therefore wants lenders to take an unfairly large financial haircut.

The question that the federal bankruptcy judge must ultimately address is whether pension promises are a debt subject to reduction or occupy a special category and are exempt from the bankruptcy process, as the city and CalPERS maintain. After Stockton filed its bankruptcy petition, however, the city's voters, angry over the civic embarrassment and rising crime rates, elected a new mayor, Anthony Silva, and some like-minded City Council members who promised big changes.

Silva wasn't kidding. He's championed a ballot measure that would raise the local sales tax by a half-cent, raising an estimated $18 million a year that would be entirely spent on beefing up the city's Police Department.

Given Stockton's growing reputation for violent crime — a new state data report says San Joaquin County, i.e. Stockton, has the state's highest homicide rate — it's hard to argue with the need for better policing.

However, proposing a tax increase while the city's bankruptcy case is pending may undermine its argument that the city has no option to reneging on its bonded debt. And that consequence has sparked an open conflict between Silva and City Manager Bob Deis, who was brought aboard to steer the city through its fiscal meltdown.

Silva is adamant. "I'm ready to battle for you, Stockton," the fiery Silva declared during his State of the City address this month.

"Will you come? Are you guys ready to battle to change this city?" If the tax hike succeeds, however, one could envision attorneys for the bondholders and insurers arguing persuasively that it proves that Stockton could have raised taxes to pay its debts.

The case has nationwide ramifications because it potentially opens the door to stressed cities reducing pension benefits and because the municipal bond industry is warning that if it takes a big loss, it will make state and local borrowing more difficult and more costly, especially in California.


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