Tue Feb 26, 2013 7:13pm EST
By Jim Christie
SACRAMENTO, Calif. Feb 26 (Reuters) - The federal judge overseeing the municipal bankruptcy case of Stockton on Tuesday ordered a trial next month over the issue of the city's eligibility to pursue bankruptcy protection from its creditors.
Chief Bankruptcy Judge Christopher Klein said that the California city and creditors contesting its bankruptcy filing could present evidence and witnesses on the eligibility issue during a four-day trial during the week beginning on March 25.
Klein said he was eager to bring the eligibility issue, a key threshold in the Chapter 9 municipal bankruptcy process, to a head.
"This case needs to make progress," he said. "We're getting to the point where it's time for me to do my job."
Klein added that he would decide the eligibility issue "promptly."
Stockton, a city of 300,000 in California's Central Valley, last year became the biggest U.S. city to file for bankruptcy with a plan to impair nearly $200 million of its debt. The city fell on hard times when its revenue plunged after its once-torrid housing market went bust.
Two decades of generous employee benefits, poor fiscal management and too much debt also caught up with the city, which is 85 miles east of San Francisco.
Bond insurers National Public Finance Guarantee Corp and Assured Guaranty have more than $350 million in exposure to Stockton's debt and are contesting the city's plan to restructure its finances through bankruptcy court.
The two insurers oppose Stockton continuing payments to the state's pension fund for public employees - the California Public Employees' Retirement System - while halting payments to some bondholders.
Klein said he was unsure the payments to the pension fund are a matter for the trial on eligibility, though they could become an issue if Stockton establishes it has met federal and state requirements to restructure its finances in bankruptcy court.
Earlier on Tuesday, Stockton said it reached a deal on $21.6 million in debt payments with Ambac Assurance Corp, the insurer for certificates of participation the city issued in 2003 to finance housing projects.
The agreement puts "a cap on the amount of money that could be paid each year out of the city's General Fund, provides for use of the reserve fund to pay some of the debt obligation and, if necessary, extends the term of repayment," the city said in a statement.
The agreement allows Stockton to maintain essential public services such as the police station, fire stations and a library, the statement said.
"Rather than responding with an unreasonable and expensive, litigation-intense strategy, as some creditors have done, Ambac diligently worked with the city to achieve a consensual resolution," Stockton City Manager Bob Deis said in the statement.
"This agreement is an example of what can be accomplished during the city's bankruptcy with creditors who are willing to engage in meaningful negotiation," Deis said.
A spokesman for Ambac said, "We are pleased to have reached a mutually agreeable settlement."
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