Bankrupt Stockton defends financial plan in court

FRESNO, Calif. (AP) — The largest city in California to file for bankruptcy protection is asking a judge Monday to approve its plan for reorganizing more than $900 million in long-term debt to rescue the city from two years of financial uncertainty.

Standing in Stockton's way is Franklin Templeton Investments, which says the city is treating it unfairly. In 2009, Templeton loaned Stockton $35 million to build firehouses, parks and move its police dispatch center. Franklin says the city today is offering it $350,000.

The city has reached deals with all of its major creditors, except for Franklin, which is taking Stockton to a trial before U.S. Bankruptcy Judge Christopher Klein.

Stockton's bankruptcy attorney Marc Levinson recently told the City Council that he knows Franklin isn't happy. "We are choosing our battles and fighting where we have to fight and making deals where we can," Levinson said.

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.

Stockton's leaders say the city fell victim to an unforgiving boom-and-bust economic cycle.

Before the recession, leaders spent millions of dollars revitalizing the 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.

Franklin argues that Stockton agreed to pay its other creditors 52 percent or more of what they owe over the next 40 years. At trial, the judge has the power to approve or reject Stockton's plan. City Manager Kurt Wilson has said the bankruptcy could be over as soon as June 30. But if the judge rejects this plan, it could take another six months, he said.

Commenting on the bankruptcy trial, San Francisco attorney Michael Sweet noted that the judge has questioned whether the California Public Employees' Retirement System, which manages the city's pensions plan, should be brought into the reorganization plan.

"If that pops up again, it's huge," Sweet said.

The city says cutting pensions would make it hard to hire workers, such as police.

Jeff Michael, an economist at Stockton's University of the Pacific, said he was surprised Stockton didn't reach a deal with Franklin to avoid the trial.

While home building remains low, Michael said the economy surrounding Stockton is starting to improve and crime in the city has declined.

"Some optimism is coming back," he said. "It's not a case of endless downward spiral."