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Tax vote puts bankrupt California city on track for solvency

By Jim Christie

SAN FRANCISCO (Reuters) - Voters in Stockton, California approved a tax hike on Tuesday, putting a city that had been regarded as a test case of pension spending in U.S. municipal bankruptcies closer to regaining solvency.

Until Detroit filed for bankruptcy earlier this year, the city of roughly 300,000 residents in California's Central Valley had been the biggest U.S. city to file for legal protection from its creditors.

The increase in the sales tax in Stockton from 8.25 percent to 9 percent will raise about $300 million over 10 years and allow the city to move on with restructuring its finances and hire more than 100 additional police officers.

Those priorities were potent selling points for a crime plagued city where services have been slashed in recent years, said Jack Pitney, professor of government at Claremont McKenna College.

Some 52.5 percent of voters approved the measure compared to 47.5 percent who opposed it, results showed.

"Under other circumstances it might have had a tougher time, but when the cupboard is bare you have to find some way to restock the shelves," Pitney said.

Stockton recently filed its plan to exit bankruptcy with the judge overseeing its case. The plan includes concessions from current and retired employees, settlements with creditors and the expectation of revenue from the tax increase.

Without that revenue, Stockton would have to restart talks with its creditors and cut $11 million in spending, said Bob Deis, the architect of the city's financial restructuring.

"We would have lost credibility," said Deis, who recently retired as Stockton's city manager. "All the paperwork, all the documentation, all the deals would have come to a screeching halt."

Deis said he expects U.S. Bankruptcy Judge Christopher Klein will soon confirm the city's plan so it can exit bankruptcy early next year.

PENSION CHALLENGE

Burdened by bond debt and generous benefits for employees and retirees, and reeling from a plunge in revenues caused by the recession and the implosion of its once-hot housing market, Stockton filed for bankruptcy after furloughs, pay cuts and a 40 percent cut to its payroll failed to keep its budget in balance.

Bond insurers Assured Guaranty and National Public Finance Guarantee challenged Stockton's bankruptcy, which included plans to keep payments to its pension fund, the California Public Employees' Retirement System, intact while trying to impose losses on bondholders.

The fight was widely seen as a test of whether public pensions, an expense of growing concern to the $3.7 trillion U.S. municipal debt market, could be impaired in federal bankruptcy court like other obligations.

With such measures now off the table in Stockton, the municipal debt market is now looking to bankruptcy cases of San Bernardino, California and Detroit to see if such pensions may be impaired.

Assured and National, which back about $240 million of the city's debt, failed to block Stockton from establishing its eligibility for bankruptcy protection and recently agreed to accept losses of as much as 50 percent on some bonds.

Stockton will continue to pay into its pension fund and its retirees' pensions remain whole, but 1,100 of them are losing their health insurance, which allows the city to erase a liability of more than $500 million from its books.

(Reporting by Jim Christie; editing by Patrick Graham)

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