Instead of Going Bankrupt, Insurer Says, Stockton Should be Going after Labor and Retirees

Wednesday, July 04, 2012


With defaults on municipal bonds this year running 87% ahead of the 2011 pace, insurers are wondering about city priorities that put the community’s needs ahead of bond holders.

Leading municipal bond insurer Assured Guaranty, which insures three Stockton bonds worth $161 million, says on its website that the beleaguered city should have demanded austerity in the form of “labor and retiree concessions,” pension reform, “curtailment of non-essential City services” and the sale of city property before filing for bankruptcy,  implying a possible challenge to the move.

“Since the City Council has not engaged in any meaningful effort to initiate revenue enhancement, asset sales or pension reform, it is questionable whether the City has taken all steps necessary and available to meet the stringent eligibility criteria for filing a bankruptcy petition under chapter 9,” the website says.

The Stockton bankruptcy is sure to include consideration of retiree benefits, with the city owing an estimated $417 million for promised retiree health care. The city has $700 million in outstanding bonds, but most are being paid off by restricted sewer and water funds. A half dozen bond issues totaling about $325 million are being paid off by the general fund, which is running a $26 million deficit.

Assured Guaranty insures $60 billion in California municipal bonds and has “consolidated claims-paying resources” of more than $13 billion. The company says it will fulfill its obligations to Stockton although, it says, “Unfortunately, the City is choosing to ignore its obligations to us.”

Stockton became the nation’s largest city (nearly 300,000 residents) to opt for bankruptcy last week, joining nearby Vallejo (population: 116,000), which declared in 2008. On Monday, the city council in the small Sierra Nevada ski town of Mammoth Lakes, crushed by a $43 million loss in a property development fight, voted to pursue bankruptcy. The town of 8,000, which has an annual operating budget of $18,000, tried to back out of a 1997 agreement to allow development of a hotel in exchange for improvements at the local airport but lost a lawsuit that the state Supreme Court refused to hear on appeal last year.

The financial crisis of the past four years has taken a toll on bond insurers. Municipal Bond Insurance Association (MBIA) , a former market leader with offices in San Francisco, was compelled to restructure. Ambac, the former Number 2 bond insurer, went bankrupt in 2010, as did the parent of Financial Guarantee Insurance Company.  Syncora stopped writing policies after a 2009 restructuring.

–Ken Broder


To Learn More:

Bond Insurer May Contest Stockton Bankruptcy (by Ed Mendel, Capitol Weekly)

National Public Finance Guarantee Corporation Comments on Its Exposure to the City of Stockton, California (Business Wire)

U.S. Muni Defaults Another Blow for Insurers (by Karen Pierog, Reuters)

Statement from Assured Guaranty Regarding City of Stockton, California Filing for Bankruptcy (Assured Guarantee)

Calif. Ski Town Votes to File for Bankruptcy (Associated Press)

Mammoth Lakes Files for Bankruptcy over $43-Million Judgment (by Louis Sahagun, Los Angeles Times)

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