The city
of San Bernardino, Calif., took a giant step towards filing for
bankruptcy protection from its creditors Tuesday when it declared a
fiscal emergency.
The designation allows the Southern California
city of about 210,000 to skip lengthy negotiations with its debt holders
and go straight to filing for Chapter 9, which gives
financially-stressed cities and towns protection from its creditors
while it renegotiates the terms of its debt.
It's expected that
San Bernardino will make its filing in 30 days at the U.S. Bankruptcy
Court in Riverside, California, said City Attorney James Penman.
The
City Council voted 5-2 to declare the emergency and file for bankruptcy
protection amid a dire cash crunch that has officials worried San
Bernardino can't meet payroll in August.
"The horse is out of the
barn — the whole world knows we're insolvent," Councilman Fred Shorett
said, according to the San Bernardino Sun. "I will be supporting going
forward with Chapter 9 and fiscal emergency."
The city, located 65 miles east of Los Angeles, could become the
third municipality in California to seek protection from its creditors
since late June. Stockton and the ski resort city of Mammoth Lakes have
already filed in bankruptcy court.
A fourth city, Compton on the outskirts of Los Angeles, could be the next city to turn to bankruptcy protection.
Compton will run out of cash to make its payroll on September 1, a city official said.
San Bernardino has burned through its reserves and is out of other
ways to pay for its longstanding deficit spending. It faces a deficit of
nearly $46 million.
"This problem has been coming for a long, long time," said Shorett. "It's here, now."
The extent of San Bernardino's financial
problems became public suddenly last week, prompting its city council
to vote on July 10 to begin the process of moving toward Chapter 9
bankruptcy protection as part of a plan to overhaul the city's finances.
That move caught San Bernardino's residents by surprise and many have
spoken out against a bankruptcy filing, fearing its stigma for the
city.
San Bernardino's employees are particularly concerned about what bankruptcy means for their pay and benefits.
"This sets a bad example for the people of San Bernardino," said
Steve Tracy, the representative for San Bernardino's firefighters union.
"It shows the city can make contracts, agreements, and can renege on
them by filing for bankruptcy."
San Bernardino's financial staff expects to present a short-term
budget to the council on July 24 and city administrators have been
authorized to begin negotiations with the city's employee unions.
Eyes on California
The municipal debt market, which has been keeping a close eye on California, also was caught off guard by the July 10 vote and its analysts are still trying to piece together how San Bernardino's finances fell apart without city leaders stepping in to prevent it.
The municipal debt market, which has been keeping a close eye on California, also was caught off guard by the July 10 vote and its analysts are still trying to piece together how San Bernardino's finances fell apart without city leaders stepping in to prevent it.
"They either didn't know, which is shameful, or they did know, which
is worse," said Dick Larkin, director of credit analysis at municipal bond broker-dealer HJ Sims.
Penman said last week that financial documents had been falsified in
13 of the past 16 years but has not made evidence of the claim public.
A former city manager who warned the city council in mid-2010 that
San Bernardino faced financial ruin, the city's mayor and its auditing
firm say they are unaware of any wrongdoing.
Larkin said he expected the city council would press ahead with a
Chapter 9 filing given the severity of the city's financial trouble.
"They seemed hell bent to do it," he said. "I understand they're just
about out of cash. I got the feeling that when they voted last Tuesday,
they were out of options."
A state law approved after Vallejo, California, declared bankruptcy
in 2008 requires financially troubled cities to enter into talks with
creditors to try to avert bankruptcy.
But the law also allows cities to skip talks and move directly toward
a bankruptcy filing by declaring a fiscal emergency and stating that
they are unable to pay their obligations within 60 days.
Reuters and The Associated Press contributed to this report.
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