Finance

San Bernardino: 3rd California City to Seek Bankruptcy Protection

San Bernardino, facing the possibility of missing payroll, becomes California's third city in weeks to authorize a bankruptcy filing.
by | July 11, 2012

By Phil Willon, Los Angeles Times

San Bernardino on Tuesday became the third California city in less than a month to seek bankruptcy protection, with officials saying the financial situation had become so dire that it could not cover payroll through the summer.

The unexpected vote came at the suggestion of the interim city manager, who said the city faces a $46-million deficit and depleted coffers.

"We have an immediate cash flow issue," Andrea Miller told the mayor and seven-member City Council.

Mayor Patrick Morris called the decision, passed on a 4-2 vote, a "stain" on the city. But he said the only other option was "Draconian cuts" to all city services, including the police and fire departments.

"It means the bills will be paid," said a dejected Morris, who is not a voting member of the council.

The city's fiscal crisis has been years in the making, compounded by the nation's crushing recession and exacerbated by escalating pension costs, lucrative labor agreements, Sacramento's raid on redevelopment funds and a city reserve that is tapped out, officials said.

Miller told the council that the city faced major deficits for the next five years. The deficits remain even after the city negotiated $10 million in concessions from employees and slashed the workforce 20 percent over the last four years.

The expected bankruptcy for the city of 209,000 residents is certain to heighten concerns about the fiscal forecast of other struggling California cities, which have been slashing jobs and services as tax revenues have declined during the prolonged economic slump.

View a map of bankrupt or near-bankrupt cities and counties in the U.S.

San Bernardino "is still facing the possibility of insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth and increases in pension and debt costs," according to a budget analysis prepared for the council.

"The city has reached a breaking point and faces the reality of deficient cash on hand to meet its contractual and debt obligations," the report said.

City Attorney James Penman said city budget officials had "falsified" documents presented to the mayor and council for 13 of the last 16 years, masking the city's deficit spending.

"For the last 16 years the budget prepared for the council showed the city was in the black," Penman said, not naming those allegedly responsible. "The mayor and the council were not given accurate documents."

Morris was taken aback by the comments, saying this was the first time he has heard of the allegations.

City Hall was packed for Tuesday's emergency council meeting, which had been called to discuss San Bernardino's bleak finances. Bankruptcy was expected to be discussed as one option but an actual vote to file was not anticipated.

About a dozen residents urged officials to protect services for the underprivileged, libraries and public safety.

Kathy Mallon, 57, who has lived in San Bernardino for a decade, blasted the city's elected leaders for allowing the financial crisis to grow unabated and wasting millions of tax dollars on transit projects and other non-essential services. Still, she urged them to do everything possible to avoid filing for bankruptcy.

"This is lose, lose, lose all the way around. Residents will suffer. Businesses will suffer and city staff will suffer," Mallon, a member of the city's senior affairs council, said before the vote. "We elected you to handle this, and I do not want to see the outcome decided by a bankruptcy judge who has nothing at stake."

With the vote, the council instructed the city attorney to file for Chapter 9 bankruptcy protection, a section of the federal bankruptcy code for municipalities.

Councilwoman Wendy McCammack said San Bernardino had little choice. The city manager said that even if the council eliminated all services except for the police department, it would not be enough to pull the city out of its financial tailspin.

"Reorganization may be the only way to keep the city of San Bernardino on life support," McCammack said.

Filing for municipal bankruptcy protection will allow San Bernardino to renegotiate contracts, including those with employees, and stave off creditors while officials restructure the city's finances. Current employee pension obligations, one of the contributors to the city's financial straits, will not be affected, officials said.

San Bernardino's tax revenues have declined by as much as $16 million annually over the last few years, primarily because of drops in sales and property taxes.

The city joins two others in California -- Stockton and Mammoth Lakes -- that have turned to bankruptcy in recent weeks to cope with their financial problems, albeit for different reasons.

Stockton, a Central Valley agricultural hub with pockets of entrenched poverty, tried to remake itself during the last decade as a refuge for former San Francisco Bay Area residents. It blew cash on a marina, a high-rise hotel and a promenade. They flopped.

Residents also got swept up in the boom years, snapping up new tract homes on the city's outskirts. Soon, many of them were empty, victims of the nationwide foreclosure crisis. Stockton has one of the highest foreclosure rates in the country.

Tax collection plummeted and the city struggled to pay its debts. It also sized up its labor contracts and declared them unsustainable. Last month _ after a lengthy period of mediation _ the Stockton City Council voted to stop bond payments, gut employee health and retirement benefits, and squeak by on a spartan budget.

"This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens," Mayor Ann Johnston said in a statement when the city filed its bankruptcy paperwork.

Days later, the High Sierra town of Mammoth Lakes (population: 7,700) also filed for bankruptcy. Its plight had little to do with the recession.

Officials said the town could not afford to pay a $43-million breach-of-contract judgment in a lawsuit brought by a developer. That amount is nearly three times the size of Mammoth Lakes' annual operating budget.

In 1997, the town signed an agreement with Mammoth Lakes Land Acquisition to make improvements to a nearby airport's fixed-base operations. In return, the company would get rights to develop a large hotel project at the airport and an option to buy the land.

But in 2007, the town changed its priorities and refused to move forward with the hotel project until some Federal Aviation Administration issues were resolved. The developer then filed suit and won.

(Staff writer Ashley Powers contributed to this report.)

(c)2012 Los Angeles Times

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