OAKLAND, Calif., June 20 (Reuters) - The city of Stockton, California, said Wednesday that it would stop bond payments but maintain city services at current reduced levels if it is forced to file for bankruptcy later this month.
Stockton is in mediation with its creditors in an effort to avert a rare municipal bankruptcy filing for the city of 292,000 people about 85 miles (137 km) east of San Francisco.
But with a June 25 deadline looming for the mediation and a July 1 deadline for adopting a balanced budget, the city needs to move forward with a so-called pendency plan that assumes a bankruptcy filing, city manager Bob Deis said in a statement.
Stockton, which has already suspended some bond payments, needs concessions from creditors to eliminate a $26 million deficit or it will become the biggest U.S. city to file for bankruptcy.
“This is not where any of us wanted to be, but, absent restructuring agreements with our creditors, any other options would decimate the city,” he said in a statement. “The pendency plan allows us to operate until we can get a long-term plan of adjustment negotiated and approved through bankruptcy.”
Stockton’s city council will meet on June 26 to take up the pendency plan, which will not measurably reduce the city’s services, according to Deis’ statement, which noted the city has already slashed its payroll in recent years.
Stockton’s revenue has plunged in recent years after its once red-hot housing market crashed. The city has had to cut its spending by more than $90 million over three years.
The pendency plan will propose eliminating bond payments, which would follow Stockton intentionally defaulting on some debt payments, a move that triggered steep downgrades to its issuer rating by credit rating agencies since February.
The defaults also allowed a trustee for one of Stockton’s bond insurers to seize a building slated to be a future city hall and three parking garages.
The plan will also propose modifying terms labor and employee agreements along with salary and benefit reductions, including the reduction and potential elimination of city contributions to retiree medical expenses.
Stockton officials have repeatedly said the city faces a crushing liability of more than $400 million for its retiree medical expenses and that those costs must be reined in to help bolster the city’s finances.
Attorneys working for Stockton also worked for Vallejo, California, which filed for bankruptcy in 2008. It emerged from bankruptcy last year with sharply reduced payments to its retired employees for their medical coverage.
Eighteen parties are in talks with Stockton, including bond holders, bond insurers, city employees, retired employees and the $230 billion California Public Employees’ Retirement System, which manages pensions for the city. (Reporting by Jim Christie; Editing by Lisa Shumaker)