Atwater, California mulls fiscal emergency, bankruptcy

SAN FRANCISCO, Sept 19 Wed Sep 19, 2012 9:12pm EDT

SAN FRANCISCO, Sept 19 (Reuters) - Officials in Atwater, California, will meet on Wednesday evening to begin discussing whether to declare a fiscal emergency, which would allow them to move forward with a Chapter 9 bankruptcy filing for the city if necessary.

California law requires financially troubled local governments to try to enter talks with their creditors to avert bankruptcy filings. The local governments may, however, declare fiscal emergencies to circumvent that rule.

The city council in San Bernardino, California, in July authorized a bankruptcy filing for the city after declaring a fiscal emergency. The city of 210,000 residents 65 miles (104 km) east of Los Angeles filed for bankruptcy on Aug. 1 following a report that said it had tapped out its reserves and projected spending would top revenue by $45 million in the fiscal year that began on July 1.

If the leaders of Atwater declare a fiscal emergency, the city of approximately 28,200 residents in Merced County in California's Central Valley could become the fourth city in the state to file for Chapter 9 bankruptcy this year.

Atwater is located 62 miles (100 km) southeast of Stockton, California, a Central Valley city of 300,000 residents that filed for bankruptcy in June after lengthy confidential talks with creditors failed to produce concessions to help it close a $26 million budget gap.

The U.S. municipal market debt market is on high alert for any signs of financial stress that could tip more local governments in the most populous U.S. state in the direction of Chapter 9 bankruptcy, which can be used to breach contracts, including those with lenders.

California cities face ongoing financial challenges from rising employee compensation and restrictions on their ability to raise revenue, which will maintain pressure on their credit ratings, Fitch Ratings said in a statement on Wednesday.

The cases of Stockton and San Bernardino are concerning, Fitch added, because "in both cases management suggested bondholders accept delayed, and perhaps reduced, payments rather than significant reductions in labor costs, though San Bernardino does provide for full debt service in its current budget."

A notice of a special meeting for Atwater's city council said the city's revenue and general fund have been "critically reduced" by the recent economic downturn.

"Though it was anticipated that the economy would recover by now, this recovery has not materialized," the notice said. "At the same time, the City continues to face increasing costs in its personnel budget, including wage, pension, and other fringe benefit costs."

Atwater faces a general fund deficit of $3.3 million, the notice said. "Without further action, the City will not be able to pay its obligations," it added.

According to the notice, city staff have recommended to Atwater's city council that it take up the matter of a fiscal emergency again on Oct. 3.

That will give city staff time to work on solutions to avoid a bankruptcy filing and gather material needed for a fiscal emergency declaration, according to the notice.

"While bankruptcy is always a last resort, if other solutions do not allow the City to meet its legal obligations to balance its FY 12/13 operating budget, while providing adequate levels of services necessary for the health, safety, and welfare of the citizens of Atwater, the City may be required to seek bankruptcy protection," the notice said.

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