San Bernardino Mayor Pat Morris ponders a question Wednesday, July 11, 2012, regarding the Tuesday city council vote authorizing a bankruptcy filing outside San Bernardino City Hall in San Bernardino, Calif. City officials have said San Bernardino “has an immediate cash flow issue” and may not be able to make payroll with a budget shortfall of more than $45 million in the next fiscal year. (AP Photo/The San Bernardino Sun, Rick Sforza) Photo: Rick Sforza, Associated Press / SF
Published 10:35 p.m., Saturday, July 14, 2012
Sacramento –San Bernardino’s stunning news last week that it was broke and needed to file for bankruptcy protection has some observers wondering who’s next.
San Bernardino is the third California city, after Stockton and Mammoth Lakes (Mono County), to declare bankruptcy within the past three weeks. And while Stockton’s June 28 filing wasn’t surprising – city officials had talked publicly about the problem for months – the moves by San Bernardino and Mammoth Lakes were.
Part of the reason, finance experts say, is that it’s not in a city’s best interest, financially, to bring up the possibility of bankruptcy: Talk of bankruptcy alarms credit rating agencies, which can use the public discussion as a reason to downgrade a city’s rating, leading to increased borrowing costs for the city.
“It’s in the public interest for them to be very, very careful about it,” said Chris McKenzie, executive director of the League of California Cities.
While city bankruptcies are rare, California cities are increasingly struggling with the slow economic recovery, smaller budgets, state budget cuts and the dissolution of redevelopment agencies.
This year, officials in the city of Hercules said they averted pursuing bankruptcy protection by settling a $4.1 million lawsuit from a bond insurer who filed suit after the city defaulted on a bond interest payment. The Contra Costa County city’s financial troubles were exacerbated by the loss of redevelopment funding, and it continues to struggle.
Warnings from 8 cities
An additional eight California cities, including Fairfield, which declared a fiscal emergency in April, have officially notified the municipal bond market this year that they are facing significant financial hardship, according to Matt Fabian, managing director of Municipal Market Advisors, which conducts independent research on the municipal bond industry.
The notifications don’t necessarily mean these cities are headed for bankruptcy court, but they do signal real adversity.
Along with Fairfield, the other cities include Arvin (Kern County), El Monte (Los Angeles County), Grover Beach (San Luis Obispo County), Lancaster (Los Angeles County), Monrovia (Los Angeles County), Riverbank (Stanislaus County) and Tehachapi (Kern County).
“I think people in our market are certainly getting more concerned,” Fabian said. “San Bernardino came out of nowhere, which makes you worry that there are others in a similar situation that you don’t know about.”
In Fairfield, officials said the city is not in danger of declaring bankruptcy but that it faces a deficit of almost $8 million in the 2013-14 fiscal year, which they said is because of the state swiping local dollars for its budget and the elimination of redevelopment agencies.
David White, director of finance and assistant city manager for Fairfield, said that after years of cutting back on services, the declaration of a fiscal emergency was necessary to place a sales tax increase on the November ballot.
“We are at the point now where we cannot cut any more from our budget without severely impacting services and the quality of this community,” White said. “I’ve never worried about going down the bankruptcy road.”
Tax revenue plummets
The unusual occurrence of three bankruptcy actions in such a short amount of time has raised red flags, though.
In Stockton, which filed for Chapter 9 bankruptcy protection, tax revenue plummeted with the national mortgage crisis, which hit the city particularly hard. Bad financial practices, overspending on civic structures and generous retiree benefits also brought the city to fiscal distress.
Mammoth Lakes filed for bankruptcy July 3 entirely because of a $43 million judgment against the city in favor of a developer who sued and won for a breach of contract for a hotel development near the airport. The action has been viewed as an outlier compared with the other two cities, whose financial problems are systemic and long term.
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