SAN FRANCISCO San Bernardino, the third California city planning to file for bankruptcy since June, would default on debt, freeze vacant jobs and quit paying into a retiree health fund under a three-month proposal to be submitted to the city council on Tuesday.
The city is preparing a longer interim plan to make it through its expected bankruptcy period, when it will financially regroup under court protection from a financial hole created by a combination of the bad economy and poor management.
It is also in the middle of accounting probes and expects more, Interim City Manager Andrea Travis-Miller and Director of Finance Jason Simpson said, with little elaboration, in a memo outlining the plan.
The three-month Fiscal Emergency Operating Plan follows a trail blazed by Stockton, California, which is seeking bankruptcy protection and wants to restructure debt, end retiree health payments and continue to send full contributions to the state fund which manages city pensions.
Prepared for the council's Tuesday meeting, the plan recommends deferring $3.6 million in debt and lease payments, including on pension bonds and infrastructure bank loans.
The city council would also consider other emergency measures, such as a freeze of non-essential vacant positions, spending cuts organization-wide, suspending all equipment purchases and deferring any new Capital Improvement Program projects.
The city of about 210,000 located 65 miles east of Los Angeles had avoided wider scrutiny of its financial problems until the city suddenly began preparing for insolvency earlier this month.
In the past few weeks, it has declared a fiscal emergency and begun preparing for a bankruptcy filing, revealing a $45.8 million shortfall for the budget year that began this month.
The timing of the proposal to suspend debt payments surprised some traders on the $3.7 trillion municipal bond market.
"Frankly in the past, bondholders were not subjected to losses," said Kurt van Kuller, managing director at the Division for the Americas of Bank of Tokyo-Mitsubishi. "They maybe have more willingness to default at an earlier stage."
San Bernardino, like Stockton, would not stop payments to the California Public Employees' Retirement System, the state pension fund which runs some city funds as well.
On Tuesday, there were no major trades of tax-exempt San Bernardino bonds on the market. Tax-exempt California general obligation debt was well supported by both dealers and customers on Tuesday. The 10-year spread over triple-A bonds closed on Monday at 74 basis points, well below the yearly average of 81 basis points.
The distant suburb of Los Angeles was one of the biggest beneficiaries of the housing boom -- and forests of foreclosure signs attest to its bust, which also emptied city coffers dependent on property taxes. The city projected $166.2 million in spending and $120.4 million in revenue for the fiscal year just begun, without the proposal on Tuesday.
A five-year forecast included with the plan projected the $45.8 million shortfall in the current fiscal year would rise to about $49 million annually for the next four years.
The council ignored repeated warnings from city officials that it was headed for financial disaster. And in the Tuesday filing, the city officials repeated there were "issues with financial reporting in prior periods" and that several investigations were in progress.
"Audits of the City's Community Development Block Grant (CDBG) funding by the Department of Housing and Urban Development (HUD) and EDA funding by the State Department of Finance are underway, and it is anticipated other agencies may initiate audits of Federal and State funds awarded the City," it said. It did not provide more details.
To view San Bernardino's Fiscal emergency operating plan, please click here - r.reuters.com/qez59s
(Reporting by Peter Henderson, Jim Christie and Tiziana Barghini; Editing by Chizu Nomiyama, James Dalgleish, Gary Crosse and Phil Berlowitz)