UPDATE 3-San Bernardino, California, files for bankruptcy with over $1 bln in debts

Thu Aug 2, 2012 12:07am EDT

* Third California city to file for bankruptcy

* Follows Stockton and Mammoth Lakes

* Fears other cities will file for bankruptcy

By Tim Reid

LOS ANGELES, Aug 1 (Reuters) - San Bernardino filed for bankruptcy protection on Wednesday citing more than $1 billion of debts and making it the third California city to seek protection from creditors.

The city of about 210,000 residents 65 miles (104 km) east of Los Angeles declared a fiscal crisis last month after a report said local government had tapped out its reserves and projected spending would top revenue by $45 million in the fiscal year that began on July 1.

The filing, made in the United States Bankruptcy Court, Central California District, states that the city has "more than $1 billion" in liabilities, and estimated that it has between 10,001 and 25,000 creditors.

It also states that San Bernardino has estimated assets of more than $1 billion.

San Bernardino's city council voted on July 24 to adopt an emergency three-month fiscal plan that would suspend debt payments, freeze vacant jobs and quit paying into a retiree health fund while city staff produce a more detailed bankruptcy plan.

"The bankruptcy filing was just to get the protection in place, to kick the process off," a city spokesperson said.

In late July, San Bernardino reported it had $56 million in indebtedness payable from its general fund, the main budget, including payments on a $50 million pension bond. There is an additional $195 million in unfunded pension obligations, $61 million in unfunded retiree healthcare, and $40 million of workers compensation, compensated absenses and general liabilities.

In the past two months, the cities of Stockton and Mammoth Lakes have also filed for Chapter 9 bankruptcy protection, a special bankruptcy provision for municipalities.

Stockton, which like San Bernardino has suffered from the housing crash that was particularly acute in southern California, filed for bankruptcy in June, becoming the largest U.S. city to do so.

Other cities in California are also in deep fiscal trouble and more could file for bankruptcy.

Cities have had the option of filing for bankruptcy since a law was passed during the Great Depression, but it is a relatively rare occurrence. Only about 640 such filings have been made since 1937.

The three California bankruptcy cases will be closely watched by investors and markets. They will be major test cases of whether cities in financial trouble can be allowed to renege on their bond debt and pension obligations.

On July 17, the mayor of Compton, a city outside Los Angeles, said he had asked state auditors to look into unspecified "waste, fraud and abuse of public monies." That city could file for bankruptcy by Sept. 1, its financial officials said.

In Victorville, California, auditors in January said there "was substantial doubt about the city's ability to continue as a going concern."

In San Bernardino, a recent report by the city attorney said officials had falsified budget reports to the mayor and council for 13 of the last 16 years, hiding the scale of the city's debt.

City council members have rejected that allegation, part of a wider political and legal battle in the city over San Bernardino's biggest expense - pay and benefits for police and firefighters.

In a city with 15 percent unemployment, and where tax revenues have been badly hit by joblessness and the housing crash, the city estimates that public safety spending accounts for 73 percent of the general fund benefit.

Pension costs will reach $25 million this year, double the 2006 level.

The San Bernardino's County sheriff's department confirmed last month that an investigation "related to allegations of possible criminal activity within departments of the San Bernardino city government" was underway.

It is not clear if the investigation involves wrongdoing related to the city's budget.

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