San Bernardino third California city to seek bankruptcy

SAN FRANCISCO Wed Jul 11, 2012 11:58am EDT

Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph. REUTERS/Mario Anzuoni/Files

Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph.

Credit: Reuters/Mario Anzuoni/Files

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SAN FRANCISCO (Reuters) - The city council of San Bernardino, California, voted on Tuesday to file for bankruptcy, marking the third time in recent weeks a city in the most populous U.S. state has opted to seek protection from its creditors.

The decision by the leaders of San Bernardino, a city of about 210,000 residents approximately 65 miles east of Los Angeles, followed a report by city staff that said the city faced an imminent financial crisis.

The report said the city had exhausted its reserves and projected that spending would exceed revenue by $45 million in the current fiscal year which started on July 1.

According to media reports, the city attorney general James Penman said San Bernardino's city officials had been submitting false accounting documents for 13 of the last 16 years in an effort to hide the real financial situation of the city.

Chapter 9 bankruptcy would give San Bernardino an opportunity to restructure its battered finances, city staff said during a webcast of the city council meeting.

But the council's vote may backfire on San Bernardino in the municipal debt market, and raises concerns about local officials in California potentially looking to bankruptcy protection as an easier solution than making tough decisions about spending cuts and raising revenue, said Dick Larkin, director of credit analysis at muni bond broker-dealer HJ Sims.

"Am I troubled? You bet," said Larkin. "I couldn't believe how quickly this vote happened."

Larkin noted the concerns of San Bernardino's staff about the risk of the city not meeting its payroll in coming months may be eclipsed by concerns it could be frozen out of the muni debt market if it goes through with a bankruptcy filing.

It may take San Bernardino 30 days to complete the actual filing, according to its city attorney.

"I hope California isn't becoming the flashpoint for municipal bankruptcy because if that happens then everyone in the state will be paying for it," Larkin added. "If there are more coming, there will be big penalties to (municipal debt) issuers in California, all the way up the state level."

San Bernardino will join the California communities of Stockton and Mammoth Lakes in bankruptcy court.

Stockton failed after three months of talks with its creditors to obtain concessions to close its $26 million budget gap and the city of nearly 300,000 in the state's Central Valley last month became the most populous U.S. city to file for bankruptcy.

Mammoth Lakes, a ski resort town of about 8,000 residents, last week filed for bankruptcy due to a nearly $43 million legal judgment against it.

Like Stockton, San Bernardino has suffered from the housing crash and high unemployment. According to the report to its city council, the city "has reached a breaking point and faces the reality of deficient cash on hand to meet its contractual and debt obligations due in July 2012."

"The city has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year and has reduced the workforce by 20 percent over the past four years," the report said.

"Yet, the city 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."

(Editing by Lisa Shumaker and Mohammad Zargham)

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Comments (35)
Writer17 wrote:
Mammoth Lakes is different. Why pay some shyster scum lawyer $40,000,000 because he broke a fingernail? Tell this f_cking lawyer to go to hell.

As far as California goes, get the hell out of my country!

I refuse to pay huge federal taxes transferred to you to support your drunken spending on illegal immigrants, your $100 billion Fast Train to Nowhere, your idiotic anti-Bush stem-cell waste, etc.

Jul 11, 2012 1:46am EDT  --  Report as abuse
0ldRNCowboy wrote:
Gee, the liberals in California can’t find the money to pay for their entitlement programs. Go figure.

Jul 11, 2012 1:55am EDT  --  Report as abuse
ccsccs123 wrote:
California is the test beg for the U.S. ! And what do you know, it’s run by Democraps.

Jul 11, 2012 2:05am EDT  --  Report as abuse
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