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Calif. City Heading To Bankruptcy Court

By TRACIE CONE

SACRAMENTO, Calif. (AP) â¿¿ Lawyers for the California city of Stockton said Monday it has cut its budget and services to the bone and has no choice about trying to become the most populous U.S. city to enter bankruptcy.

Creditors countered that the city has failed to cut enough spending or even seek a tax increase to avoid Chapter 9 bankruptcy protection.

The arguments came as the city faced off Monday with its creditors in U.S. Bankruptcy Court at a trial to decide the issue.

Stockton has become emblematic of government excess and the financial calamity that resulted when the nation's housing bubble burst.

Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures.

In his opening statement at the trial, Mark Levinson, an attorney representing the city, argued it has no other option but bankruptcy.

"Stockton is a city of 300,000, and I venture to say none of them is happy about bankruptcy," Levinson said.

Creditors, however, complained that Stockton had failed to negotiate cuts in the money it pays into the state pension fund, which represents its largest debt.

"The city is not insolvent," said Guy Neal, an attorney for the city's bond insurers. "The city has stacked the deck in favor of insolvency by padding the budget with non-essential expenditures. Stockton can and should do more to reduce expenses."

The creditors want the city to avoid bankruptcy, which would likely allow Stockton to avoid repaying the debts in full.

The trial will determine whether the city negotiated with its creditors in good faith before filing for Chapter 9 protection. The trial is expected to last four days.

During testimony, Neal grilled City Manager Bob Deis about the city budget, cost-cutting negotiations with labor unions, and whether Stockton had done anything to reduce the amount of money it owes CalPERS, the state pension fund, or even considered setting up its own plan.

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