Stockton, Calif., issues checks to creditors in bankruptcy exit

(Reuters) – The California city of Stockton says it has begun paying creditors as a final step to exit bankruptcy after more than two-and-a-half years dealing with over $2 billion of debt.

“We’re very pleased to say the plan will go effective today,” said Stockton’s attorney Marc Levinson.

Stockton, a city of 300,000 east of San Francisco, wrote checks to 1,100 retirees for their health benefits claims and to other general unsecured creditors earlier this week. Once the wire transfers were completed on Wednesday, the city will be “out of bankruptcy,” meaning it had restructured its obligations, Levinson said.

Stockton was the largest city in U.S. history to file for Chapter 9 bankruptcy in June 2012, after suffering from a housing market crash and from financial mismanagement. The city’s bankruptcy was eclipsed a year later by Detroit, which exited bankruptcy last year.

Stockton’s case, along with a handful of other bankruptcies, such as Detroit and San Bernardino, Calif., have been closely followed by the $3.6 trillion U.S. municipal bond market.

Bondholders and public employees alike are interested in understanding how distressed cities handle their debts to Wall Street compared with other creditors, such as Calpers, the country’s largest pension fund.

Stockton’s plan to exit bankruptcy was approved in October with a reduction of debts imposed on creditors, including Franklin Templeton Investments, which took a haircut from its collateral of golf courses and a park.

Bondholders were also forced to make concessions and retirees lost healthcare benefits worth $550 million. Pensions administered by Calpers were, however, left untouched.

Franklin has argued that the city’s refusal to alter pensions was unfair and says it will appeal the city’s exit plan to an appellate board.

San Bernardino, a city near Los Angeles in its third year of Chapter 9 protection, faces lawsuits from some bondholders for giving preferential treatment to California’s public pension system, which the city proposes to pay in full.

(Reporting By Robin Respaut; editing by Andrew Hay)