Did you understand the city’s out-of-court settlement with the bond insurer Ambac?
Me neither. At least not from the city press release.
But the deal is the first out-of-court agreement with a major creditor. That’s significant. And, frankly, though the city is better run now, gone are the days when it is possible to be sanguine about any major city fiscal action. From now until retirement day, we must slog through the weeds and understand the details.
The context: in 2003, Stockton was in such dubious fiscal shape that when it wanted to borrow money in the form of two bond issues totaling $21.6 million and do the Hotel Stockton redevelopment project, the creditors insisted on two kinds of security: repayment by tax increment had to be backed by the general fund; and — wait for it — the main police station was put up as collateral.
Also The Maya Angelou library branch. And fire stations 1, 5 and 14.
Don’t ask me what Ambac would have done with this collateral. But obviously it was important for the city to retain control of these facilities.
The deal the city struck is this: the city gets more time to replay the loan, which it will repay in full. If the tax increment doesn’t materialize until the recovery, what could have been a $1 million annual hit to the general fund — with consequent hits to city services — is now capped at $800,000.
Every bond issue has a reserve fund structured into the deal; the city can use its $1 million reserve to make the 2014 payment. That reduces the General Fund’s exposure by 70 percent. If, in years to come, the city still has trouble paying, the payments can be strung out to 2043 at 8 percent interest.
This is a perfectly reasonable deal. The city buys time, and protects its services and assets. True, it has to pay Ambac’s legal costs, but at roughly $200,000 that’s a steal compared to the costs of litigation.
Ambac gets all its money.
And both sides avoid the costs and drama of bankruptcy court.
In fact, this deal seems so mutually beneficial, it’s hard to understand why other bond insurers aren’t agreeing to similar settlements. Perhaps they will. I ran into City Manage Bob Deis one night this week and asked him about the settlement.
“The tide is turning,” he said.