Budget officials flee San Bernardino amid bankruptcy chaos

LOS ANGELES (Reuters) - Top budget officials in crisis-hit San Bernardino, California, are quitting the city at a crucial juncture in its quest to seek bankruptcy protection.

A rush to the doors in San Bernardino city hall threatens the city's ability to qualify for Chapter 9 bankruptcy protection by robbing it of the people with the experience to answer questions from the court and creditors. If those questions are not answered, the judge could deny bankruptcy protection, experts say.

San Bernardino's interim city manager Andrea Travis-Miller has quit and will start a new job on February 19.

The city's finance chief Jason Simpson is also expected to leave soon, a source inside the city said. The city's head of human resources has also quit, as has its head of code enforcement.

Travis-Miller and Simpson assumed their roles last year and have been the two key figures in bringing to light San Bernardino's fiscal problems.

Travis-Miller and Simpson did not immediately respond to emails or phone calls.

There are few other, if any, officials with a deep understanding of the city's finances. Their loss calls into question whether San Bernardino has the ability to present a viable plan to satisfy creditors, and a bankruptcy court, that it should qualify for bankruptcy protection. All parties meet in court on February 12 to argue that issue.

The two officials have been the central figures in overseeing the city's finances since it filed for bankruptcy protection in August, citing a $46 million deficit for this fiscal year and little leeway to make day-to-day wage payments.

PENSION FUND FIGHTING BANKRUPTCY

The next major decision for the federal judge overseeing the case is whether the city should be granted bankruptcy protection. Such protection safeguards the city from creditor lawsuits until its finances are restructured under the auspices of the court.

The city's biggest creditor, California's public employee's pension fund, has opposed San Bernardino's quest to seek bankruptcy protection. Without it, the struggling city will likely face multiple lawsuits in state court for unpaid bills, at a time when its officials say it can barely make payroll.

At a court hearing on December 21, the judge overseeing the case ordered the city to provide more financial disclosure to its creditors.

The California Public Employees Retirement System (Calpers) argued in that hearing that San Bernardino officials had provided little financial information since declaring bankruptcy in August, and that its pre-bankruptcy plan - stretching to just 12 pages - was not a good faith effort to show how it intended to deal with creditors.

That plan is in stark contrast to the pendency plan approved in June by Stockton, another California city seeking bankruptcy protection.

Stockton - a city of 292,000 that sits 85 miles east of San Francisco - produced a restructuring plan that ran to 790 pages. It came after over 90 days of mediation with the city's creditors.

San Bernardino, a city of 210,000 about 60 miles east of Los Angeles, avoided any discussions with creditors by declaring a fiscal emergency in July.

SITUATION A 'LEGAL DISASTER'

Losing its top two budget officials at such an important stage will only add to San Bernardino's difficulties to achieve bankruptcy protection, said Karol Denniston, a municipal bankruptcy expert with Schiff Hardin in San Francisco.

"This is a situation with all the makings of a legal disaster, because the expectations are that a judicial process can sort out the unsortable," Denniston said.

"The court cannot determine (bankruptcy) eligibility if creditors have not been given sufficient information. Now we have a lack of staff. There is insufficient money," Denniston said, adding that the city has so far failed to come up with a convincing bankruptcy plan.

Michael Sweet, an attorney with Fox Rothschild, said if there are not the people on the ground to provide information about the city's finances, then outside experts will have to be hired to tell the court exactly what the city's assets and liabilities are.

"If they lose their staff, it will become very expensive to find the answers to these questions," Sweet said.

An investigation by Reuters revealed in December that the city paid $2 million in cash-outs to employees for unused vacation and sick time in the three months before declaring bankruptcy.

The case is emerging as a landmark legal battle because the city has taken the unprecedented step of halting payments to Calpers, America's biggest public pension fund.

Because of that move, San Bernardino is potentially testing whether the pensions of government workers take precedence over other payments in a municipal bankruptcy, which could have ramifications for other creditors, including Wall Street bondholders, as more cities and towns have trouble meeting their obligations.

The city has not made its $1.2 million twice monthly payments to Calpers since it filed for bankruptcy last August. It now owes at least $10 million to the pension system in addition to a long-term debt that the city pegs at $143 million.

In a statement, Calpers praised the work of Simpson and Travis-Miller. The pension fund said they were key to an agreement between the city and Calpers last week to delay the next court hearing until February 12 so that the two parties could negotiate further.

"We appreciate Andrea and Jason's leadership at the City of San Bernardino during these difficult times," Calpers said.

(Reporting by Tim Reid; Editing by Lisa Shumaker)