Authorities probe San Bernardino, city mulls bankruptcy move

Fri Jul 13, 2012 8:38am EDT

1 of 2. A boarded-up storefront on Fourth Street in San Bernardino July 11, 2012.

Credit: Reuters/Alex Gallardo

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(Reuters) - Authorities are investigating financially troubled San Bernardino, California, where the city council voted this week to approve a bankruptcy filing amid a claim by the city attorney that fraudulent accounting may have contributed to the city's problems.

"Several months ago at the request of San Bernardino City officials, the San Bernardino County Sheriff's Department, along with the San Bernardino Police Department and the district attorney's office began an investigation related to allegations of possible criminal activity within departments of the San Bernardino city government," the sheriff's department said in a statement on Thursday.

"The investigation is continuing and details will not be released at this time," the statement said. "Updates will be provided as new information becomes available."

San Bernardino City Attorney James Penman on Tuesday told the city council that financial documents had been falsified for years.

On Wednesday Penman told reporters that "evidence of suggested wrongdoing" had been turned over to unnamed government agencies but declined to give details or elaborate on his comments to the city council.

A city spokeswoman could not be reached for comment on the investigation.

San Bernardino marks the third time in recent weeks that a city in the most populous U.S. state has opted to seek protection from its creditors.

Former city manager Charles McNeely said he had not been contacted by authorities. McNeely, who had warned the city council nearly two years ago that San Bernardino could be headed for bankruptcy unless drastic changes were made to its finances, submitted his resignation in March.

"It makes me wonder if it has anything to do with this latest issue," said McNeely, noting that he requested probes while in office into some of the city's operations.

The investigation will add to the municipal debt market's confusion about San Bernardino's unexpected vote to proceed toward Chapter 9 bankruptcy, said Dick Larkin, director of credit analysis at municipal bond broker-dealer HJ Sims: "It raises more questions than it answers."

Larkin noted municipal debt analysts believed San Bernardino had a handle on its financial problems until Tuesday. Now they're trying to piece together how the city's finances fell apart so abruptly, Larkin said.

The city council's vote followed a report by city staff that said the city exhausted its reserves and projected spending would exceed revenue by $45 million in the current fiscal year, which started on July 1.

"There's something strange about the whole situation," Larkin said. "Something just doesn't hang right."

CITY WEIGHS OPTIONS

The council will consider next week whether the city, which has a population of about 210,000 and sits about 65 miles east of Los Angeles, will enter into mediation with its creditors or file directly for bankruptcy protection.

A California law requires financially distressed municipalities to open talks with creditors as a way to avert a Chapter 9 bankruptcy filing, but negotiations may be skipped by declaring a fiscal emergency.

On Monday, the city council will receive an opinion from its legal staff on whether San Bernardino needs to enter into pre-bankruptcy mediation with its creditors, according to a statement from the city's spokeswoman.

City staff members are also preparing a plan to balance San Bernardino's budget that would be presented to a bankruptcy judge in the event of a Chapter 9 filing within the next 30 days, the statement said.

"While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline and that has brought us to a critical point," interim City Manager Andrea Travis-Miller said in the statement.

She also said that a Chapter 9 filing would allow San Bernardino to provide essential services and restructure its finances.

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

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

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

(Reporting by Jim Christie in San Francisco; Editing by Andre Grenon, Leslie Adler and Lisa Shumaker)

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