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Special Report: How a vicious circle of self-interest sank a California city

Firefighter Captain Tim Smith, 41, checks a building after its fire alarm sounded in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

Firefighter Captain Tim Smith, 41, checks a building after its fire alarm sounded in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the...more

Firefighter Captain Tim Smith, 41, checks a building after its fire alarm sounded in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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Craig Cochran, 44, (L) holds a sign advertising cigarettes, in the first job he has had in three years, in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Craig Cochran, 44, (L) holds a sign advertising cigarettes, in the first job he has had in three years, in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Craig Cochran, 44, (L) holds a sign advertising cigarettes, in the first job he has had in three years, in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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A sign advertising bankruptcy filing is seen hanging off a road sign in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

A sign advertising bankruptcy filing is seen hanging off a road sign in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city...more

A sign advertising bankruptcy filing is seen hanging off a road sign in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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A road sign covered in graffiti is seen in San Bernardino, California September 11, 2012. BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

A road sign covered in graffiti is seen in San Bernardino, California September 11, 2012. BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

A road sign covered in graffiti is seen in San Bernardino, California September 11, 2012. BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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School buses drive past an idle building site in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

School buses drive past an idle building site in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test...more

School buses drive past an idle building site in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area...more

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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Graffiti in memory of 21-year-old Angel Cortez is seen on the real estate sign in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

Graffiti in memory of 21-year-old Angel Cortez is seen on the real estate sign in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles,...more

Graffiti in memory of 21-year-old Angel Cortez is seen on the real estate sign in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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The central courtyard sits deserted in the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

The central courtyard sits deserted in the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of...more

The central courtyard sits deserted in the Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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A man walks past empty stores in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

A man walks past empty stores in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city...more

A man walks past empty stores in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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Anthony Russell, 21, sits in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson

Anthony Russell, 21, sits in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of...more

Anthony Russell, 21, sits in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. Picture taken September 11, 2012. To match Special Report BERNARDINO/BANKRUPT REUTERS/Lucy Nicholson
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A concrete sign marking the city limits for San Bernardino, California is seen July 11, 2012. REUTERS/Alex Gallardo

A concrete sign marking the city limits for San Bernardino, California is seen July 11, 2012. REUTERS/Alex Gallardo

A concrete sign marking the city limits for San Bernardino, California is seen July 11, 2012. REUTERS/Alex Gallardo
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A janitor cleans the floor in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court.REUTERS/Lucy Nicholson

A janitor cleans the floor in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of...more

A janitor cleans the floor in the deserted Carousel shopping mall in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court.REUTERS/Lucy Nicholson
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Firefighter John Marini, 33, takes part in a drill in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. REUTERS/Lucy Nicholson

Firefighter John Marini, 33, takes part in a drill in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a...more

Firefighter John Marini, 33, takes part in a drill in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court. REUTERS/Lucy Nicholson
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Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson (UNITED STATES - Tags: POLITICS BUSINESS)

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson (UNITED STATES - Tags: POLITICS BUSINESS)

Cracks in the parking lot are seen in front of the Carousel shopping mall in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson (UNITED STATES - Tags: POLITICS BUSINESS)
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Cracks in the road are seen next to a city vehicle in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Cracks in the road are seen next to a city vehicle in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Cracks in the road are seen next to a city vehicle in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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A memorial for 21-year-old Angel Cortez is seen in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court.REUTERS/Lucy Nicholson

A memorial for 21-year-old Angel Cortez is seen in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1,...more

A memorial for 21-year-old Angel Cortez is seen in front of the home in which he was murdered in San Bernardino, California September 11, 2012. The city of about 210,000, some 65 miles (104 km) east of Los Angeles, filed for bankruptcy on August 1, joining the Bay Area city of Stockton as a test case for whether financially troubled municipalities can shed bond payments and possibly pension obligations via bankruptcy court.REUTERS/Lucy Nicholson
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A boy leans on the gate in the home next door to where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

A boy leans on the gate in the home next door to where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

A boy leans on the gate in the home next door to where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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Maria Arias (L), 73, and her husband Manuel Arias, 73, sit in their driveway opposite the home where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Maria Arias (L), 73, and her husband Manuel Arias, 73, sit in their driveway opposite the home where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Maria Arias (L), 73, and her husband Manuel Arias, 73, sit in their driveway opposite the home where 21-year-old Angel Cortez was murdered in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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A real estate sign is seen outside a deserted home stripped of its copper wiring in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

A real estate sign is seen outside a deserted home stripped of its copper wiring in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

A real estate sign is seen outside a deserted home stripped of its copper wiring in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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Firefighter Captain Tim Smith, 41, puts on his boots to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Firefighter Captain Tim Smith, 41, puts on his boots to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Firefighter Captain Tim Smith, 41, puts on his boots to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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Firefighter John Marini, 33, rides to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Firefighter John Marini, 33, rides to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson

Firefighter John Marini, 33, rides to answer a call in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholson
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Mayor Patrick J. Morris poses for a photo in San Bernardino, California, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files

Mayor Patrick J. Morris poses for a photo in San Bernardino, California, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files

Mayor Patrick J. Morris poses for a photo in San Bernardino, California, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files
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James Penman, attorney general of San Bernardino city, talks to the media at the city council chambers, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files

James Penman, attorney general of San Bernardino city, talks to the media at the city council chambers, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files

James Penman, attorney general of San Bernardino city, talks to the media at the city council chambers, in this July 11, 2012 file photo. REUTERS/Alex Gallardo/Files
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