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

June 29, 2012

Although  the Stockton City Council filed a chapter 9 bankruptcy petition on June 28, 2012, investors in Stockton bonds insured by AGM and AGC remain fully protected by our unconditional and irrevocable guaranty to pay scheduled principal and interest in full and on time. This commitment is backed by Assured Guaranty’s strong consolidated claims-paying resources of over $13 billion.

We were approached by the City of Stockton to provide credit enhancement for the 2007 Pension Obligation Bonds (the “Pension Bonds”) and the 2007 Lease Obligation Bonds for 400 E. Main Street.  Proceeds of the Pension Bonds funded a significant portion of the City’s unfunded pension liability.  Both the City and the pension beneficiaries have benefitted and continue to benefit from this bond issuance.  Using the insurance provided by Assured Guaranty on both bond issues, the City of Stockton saved millions of dollars in interest costs as a direct result of the lower interest rates associated with our guaranty.  We viewed our participation in the bond transactions as a 30-year commitment with the City, similar to the relationship we have with many other municipalities in the State of California where we insure approximately $60 billion in bonds. 

We will continue to fulfill our obligation to the City.  Unfortunately, the City is choosing to ignore its obligations to us instead of fully addressing the real sources of its structural deficits.  Even though obligations to capital markets participants constitute a relatively small portion of the City’s general fund budget, the City proposes to treat these bonds in an unfair and disproportionate manner relative to its personnel costs.

The City Council’s decisions, and their actions to date, have made it clear that bankruptcy was the only option they seriously considered. The City Council has failed to make the politically tough decisions to adopt serious budget reforms and consider alternative plans to resolve its long-term structural deficit.  Many other cities across the country are experiencing similar financial challenges, but they (and their respective voters) have responsibly chosen to make the difficult decisions rather than choosing bankruptcy.  As evidenced by the recent voter referendum initiatives in San Jose and San Diego to address pension reform (as well as the voter-approved tax increases in the City of Hercules), voters have shown that they are capable of addressing these difficult, though not unique, challenges in a responsible manner.  Cities with similar problems and debt service have done this without resorting to bankruptcy and have avoided the long-term detrimental impact such a filing would have on Stockton. 

Bankruptcy will not only be costly and lengthy, but it will also have a negative, lasting impact on the City’s recovery for years.  Bankruptcy will also limit the City’s access to the capital markets and raise the City’s cost of capital for years to come, stunting future business growth and development.  Stockton’s City Council has not given its citizens a chance to weigh in on their future.  Bankruptcy was not the City’s only option. 

Based upon our investigation of the City’s finances and the City’s own prior and current budget proposals, we believe the City had alternatives to bankruptcy.  These reforms and solutions included the following:

• reallocation of available fund balances;
• the sale of excess or proprietary City property;
• the curtailment of non-essential City services;
• the abandonment of unfunded redevelopment activities;
• labor and retiree concessions;
• the restructuring of debt; and
• voter-approved revenue enhancement measures and pension reform. 

We believe that these measures, in their totality, would permit the City to construct a viable plan to solve its fiscal problems. In addition, these budget measures should be incorporated into the City’s plan of adjustment to ensure that Assured Guaranty and the other creditors are treated in a fair and non-discriminatory manner. We volunteered our team of municipal turnaround experts to sit down with the City to offer a plan that would have allowed the City to avoid filing for bankruptcy, and – notwithstanding the City’s failure to accept this offer and subsequent bankruptcy filing – this offer of assistance continues to remain open. 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.

Assured Guaranty intends to vigorously enforce its rights as a creditor in any chapter 9 proceeding, including the right to contest eligibility and confirmation of any plan of adjustment proposed by the City that seeks to unfairly discriminate against Assured Guaranty. 

The following is a summary AGM’s and AGC’s insured exposure to general fund obligations of the City of Stockton as of May 31, 2012:

See also our August 1, 2012 Statement on Stockton, California