Stockton seeks to exit from bankruptcy

SACRAMENTO, Calif. (AP) — Stockton residents will likely learn Thursday if they can put more than two years of financial uncertainty behind them.

Marking a critical moment in the bankrupt city's financial recovery, Stockton will ask U.S. Bankruptcy Judge Christopher Klein to approve a plan for reorganizing more than $900 million in long-term debt over objections from a lone creditor that argued it was treated unfairly.

Franklin Templeton Investments argues the city isn't touching a massive employee pension, while asking the investment firm to walk away from collecting on nearly $32.5 million still owed. Klein ruled earlier this month that bankruptcy law allows the city to treat pension obligations like any other debt, meaning the city could trim benefits.

Marc Levinson, the city's lead bankruptcy attorney, declined to comment on the city's treatment of its contract with California Public Employees' Retirement System, or CalPERS, in light of Klein's ruling.

"I don't know that it will come into play," said San Francisco-based bankruptcy attorney Michael Sweet, who has closely watched the case. He said there have been no Chapter 9 bankruptcies that attacked pensions.

In his ruling, Klein can approve the city's plan of adjustment, send the city back into negotiations with Franklin or reject the plan.

An inland port city 80 miles east of San Francisco, Stockton filed for Chapter 9 protection in 2012, making it the nation's largest bankrupt city before Detroit filed for bankruptcy last year. Vallejo went through bankruptcy before Stockton. San Bernardino filed shortly after Stockton, but it has yet to present an exit plan.

City leaders have said they turned to bankruptcy as a last resort, blaming an unforgiving boom-and-bust economic cycle.

Before the recession, leaders spent millions of dollars revitalizing downtown by buying a new City Hall and building a marina, a sports arena and a ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.

With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn't pay its bills. The city slashed millions of dollars from its budget and laid off 25 percent of its police officers. Crime soared.

David E. Mastagni, an attorney for the Stockton Police Officers' Association, said he doubts the city will break its CalPERS contract in a move to leave bankruptcy. He said the city continues to have difficulty hiring new officers and maintaining its seasoned officers. Many cities and counties are competing for the same officers as Stockton and offering raises, Mastagni said.

"If they impair the pensions, you'll see mass walk-offs," he said.