San Bernardino Is Third California City to Opt for Chapter 9

Wednesday, 11 Jul 2012 11:10 AM

 

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 San Bernardino’s City Council voted to become the third California city this year to file for bankruptcy, as it struggles with declining tax revenue, growing employee costs and accounting discrepancies in its ledgers.

The council voted 4 to 2, with one abstention, last night to authorize a filing under Chapter 9 of U.S. bankruptcy law. The city of 209,000, about 65 miles (105 kilometers) east of Los Angeles, is so broke it can’t make its Aug. 15 payroll, interim City Manager Andrea Travis-Miller said.

“If the employees are not paid on Aug. 15, on Aug. 16 there will be a mass exodus of city employees,” City Attorney James Penman told the council before the vote. “People are not going to work when they don’t get paid. Most of our employees will not show up to work. That would include police, fire, refuse, everybody. The city will virtually shut down.”

A San Bernardino filing would follow Stockton, a community of 292,000 east of San Francisco, which on June 28 became the biggest U.S. city to go into bankruptcy. Mammoth Lakes, a mountain resort of 8,200, filed for protection from creditors on July 3 saying it can’t afford to pay a $43 million judgment, more than twice its general-fund spending for the year.

Investor Anxiety

The Chapter 9 filing would allow the city to suspend payments to creditors while it seeks court approval for a plan that balances its revenue with its debt. Travis-Miller said a filing could take a month to prepare.

“When you’ve got headlines like this, it creates anxiety for investors,” said Robert Miller, a senior portfolio manager in Menomonee Falls, Wisconsin, for Wells Capital Management, which oversees about $30 billion in munis. “They’re going to require higher rates of return to buy their debt, especially at the local level.”

The $3.7 trillion municipal-debt market gained today. Yields on 10-year tax-exempt bonds rated AAA fell 0.02 percentage point to 1.86 percent, the lowest in about a month, according to Bloomberg Valuation data as of 10 a.m. in New York.

Confronting a $45 million budget shortfall, San Bernardino is facing insolvency because of accounting errors, deficit spending, pension and debt costs, and lack of revenue growth, according to a June 26 budget analysis posted on the city’s website. Officials have declared fiscal emergencies, negotiated for concessions from employees and reduced the workforce by 20 percent in four years.

‘Life Support’

“Reorganization may be the only way to keep the city of San Bernardino on life support,” said Wendy McCammack, one of the seven council members. “This is the hardest decision this councilwoman has ever had to make.”

A law signed by Governor Jerry Brown that took effect this year requires municipalities to pursue mediation or declare a fiscal emergency before seeking bankruptcy protection. The law was sought by public-employee unions after Vallejo, a city of 120,000 in the San Francisco Bay Area, which went bankrupt in 2008 and asked a court to help it void labor contracts.

It was unclear whether San Bernardino would need to go through mediation.

Penman said during the meeting that former city employees had understated the extent of San Bernardino’s fiscal woes in “falsified” reports to the council and mayor over the past 16 years. He declined to name anyone. Mayor Patrick Morris, who took office in 2006, said it was the first time he’d heard such allegations.

‘New Information’

“This is a wholesale indictment of all of the officials who have served over a number of years,” Morris said in an interview after the meeting. “It’s new information to me.”

San Bernardino is the seat of San Bernardino County, which at more than 20,000 square miles is the largest county by area in the contiguous U.S.

San Bernardino County and neighboring Riverside County form a metropolitan area that had the third-highest foreclosure rate in the U.S. in May, according to RealtyTrac Inc., an Irvine, California-based data provider. The area’s unemployment rate was 11.8 percent that month, compared with 8.2 percent nationwide, according to U.S. Labor Department data.

The city and its agencies have $243 million of debt outstanding, including $48.6 million of taxable pension- obligation bonds, according to financial statements. Per-person debt was $1,506, or 5.4 percent of personal income.

“Cities are running out of options,” Michael Sweet, a partner specializing in bankruptcy at the San Francisco office of law firm Fox Rothschild LLP, said yesterday in a telephone interview. “As they see pension contribution obligations and retiree health-care costs going through the roof, revenue is at best stable if not declining.”


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