By Josh Richman
Posted: 07/11/2012 03:55:56 PM PDT
Updated: 07/12/2012 07:27:17 AM PDT

San Bernardino late Tuesday became the third California city in two weeks to declare bankruptcy, sending tremors through city halls across the state and immediately raising the frightening question: Are more bankruptcies to come?

California cities and others throughout the country are asking themselves the same question as they struggle amid a still-ailing economy and bad decisions made in the boom years.

Stockton, a Central Valley city of nearly 300,000, two weeks ago became the largest U.S. city ever to seek refuge in the bankruptcy courts. Mammoth Lakes, a Mono County town of about 8,300, followed suit July 3.

Still, California’s top economists and municipal experts can’t agree if Stockton and San Bernardino are canaries in the coal mine or simply extreme examples.

“We’re going to see more of these,” said former state finance director Mike Genest, now a fiscal policy consultant. “Many of us have been predicting a substantial number of municipal bankruptcies in California for quite some time, and those predictions are starting to come true.

“It comes as no surprise to see the dominoes beginning to fall for local government. We know there are going to be more cities on the verge of a crisis, and I think it’s incredibly likely we’ll see more cities declare bankruptcy, but it’s hard to say which.”

But Michael Coleman, a municipal finance expert who advises the League of California Cities and the California Society of Municipal Finance Officers, is urging localities not to hit the panic button — yet.

Coleman acknowledged that the suddenness of San Bernardino’s announcement “took a lot of us by surprise,” adding: “We’d heard rumors of struggle there, but we hear about struggles in lots of cities.”

Mammoth Lakes is clearly a special case, having been hit with a $43 million judgment in a developer’s breach-of-contract lawsuit. The town’s general-fund budget is only $19 million.

But while a full picture of San Bernardino’s travails was still emerging Wednesday, there are definite similarities with Stockton’s plight — generous public salaries, pensions and retiree health benefits granted during better economic times but found to be unsustainable as property tax and sales tax revenue dried up. Stockton’s crisis was magnified by profligate borrowing and spending on downtown development projects based on rosy revenue predictions.

Genest said some cities, such as San Diego, have flirted with bankruptcy since before the recession began but managed to “pull the rabbit out of the hat” to remain solvent. Some, like Beverly Hills, found ways to reduce their liabilities. But with only the barest rebound in the housing market and anemic economic growth, Genest said, “this is likely to be a long-term” situation.

Chris McKenzie, executive director of the League of California Cities, disagreed.

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