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Cash-strapped San Bernardino to file for bankruptcy

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City faced prospect of missing payroll – Bond market risks?

By Chris Levister

Facing a $45-million budget shortfall and after desperately trying everything from huge budget cuts to slashing employee jobs, the San Bernardino City Council finally ran out of options Tuesday night and voted to file for municipal bankruptcy.

The city of 210,000 people will seek Chapter 9 protection, making it the third California city - after Mammoth Lakes and Stockton - in less than two weeks to make the rare move.

It would also become among the largest in the nation ever to declare bankruptcy. Stockton, the northern California city of nearly 300,000, became the largest when it filed for bankruptcy June 28. The historic 4-2-1 vote was led by council members Rikke Van Johnson, Virginia Marques, Robert Jenkins and Wendy McCammack voting in favor of the motions, with Dennis Shorett and Chas Kelley voting no and John Valdivia abstaining.

The City Council made the decision during a special meeting where Interim City Manager Andrea Miller told them San Bernardino "has an immediate cash flow issue" and may not be able to make its August payroll with a budget shortfall of more than $45 million in the next fiscal year. The city is shackled by 15.7 percent unemployment, 5,000 homes in foreclosure and plummeting tax revenues.

It was reported by an analysis that for the past 20 years the revenues have lagged behind the expenditures and just a few years ago the city lost $16 million in sale taxes. The move followed city negotiations that conceded $10 million from employees and slashed the workforce by 20 percent over the last four years.

Mayor Patrick Morris describing the city’s situation as in ‘free fall’ blames the budget crisis on soaring salary and benefit obligations, plunging property tax returns and the loss of an estimated $30 million in state redevelopment funds. “We’re preparing to make cuts across the board – This is going to be a severe financial haircut for the city,” Morris said during a webcast of the council meeting. San Bernardino has 30 days to seek bankruptcy protection in federal court.

The city manager and city attorney expect it will take a minimum of three years to reorganize San Bernardino's finances and emerge from bankruptcy. City attorney Jim Penman claims former city staff falsified past budget documents going back 15 years to make it appear that San Bernardino was in the black when it was running deficits. He declined to elaborate when asked by reporters.

Many of those in the packed council chambers appeared stunned as Penman warned of a potential city shutdown and mass exodus of city employees if the council failed to stop the bleeding. “The city needs breathing room and the bottom line is we cannot default on our payments to employees without violating the law.” Tuesday's meeting was tense from start to finish, and hundreds of people gathered in the council chambers and overflow rooms. City retirees whose benefits would be reduced clapped and jeered loudly as speaker after speaker denounced city leaders as “tyrants” and “incompetent.” “You failed us,” shouted a woman seated in the packed chamber.

As employees filed into City Hall Wednesday morning from an adjacent parking structure, many avoided reporters others had more questions than answers. “Holding our breath – waiting for the other shoe to drop”, said a city worker who asked not to be identified. “I think they had to do what was necessary to save a lot of employee misery. We’re committed to keeping the city running until we can’t.”

“I’m disappointed. This whole collapse was exacerbated by years of partisan bickering, mismanagement and dysfunction,” said another employee. “The world has been watching this City Council soap opera on the web for years. What about this is surprising?” A police officer who entered the building summed up the feelings of his fellow officers and said “sure we’re worried. We’re concerned about planned retirement or whether we will be able to afford medical insurance. The bankruptcy could pull the rug out from under us,” he said. Among the measures being proposed are restructuring the police and fire departments to reduce “non-essential services” and closing one or more inefficient fire stations. Other proposals include asking city employees to pay more of their retirement costs, reducing salary increases and offering an early retirement program.

“Our image has taken a beating over the last few years,” Mayor Morris said. “My hope is we come out of it very quickly, if we have to file and show the world we can manage our finances, we can have a solid future.”

“This is the most difficult decision I have ever had to make as an elected official,” Councilwoman McCammack said as the council prepared to vote late Tuesday night. “Sometimes you have to fall flat on your face before you pick yourself up,” she said. Sixth Ward Councilman Rikke Van Johnson is set to discuss the city’s financial situation at a town hall meeting set for Thursday, July 12 at Inghram Community Center 2050 North Mt. Vernon beginning at 6:00 p.m.

A federal bankruptcy judge will now be charged with deciding how much money on the dollar San Bernardino will pay creditors and how the city will restructure its budgets in the future. As the bankruptcy news spread far and wide some financial experts suggested the vote could backfire, others raised concerns about local officials in California potentially looking to Chapter 9 as an easier solution than making tough decisions about spending cuts and raising revenue, Dick Larkin, director of credit analysis at muni bond broker-dealer HJ Sims told Reuters News.

“I’m troubled? You bet. I couldn’t believe how quickly this vote happened.” “I hope California isn’t becoming the flashpoint for municipal bankruptcy because if that happens than everyone in the state will be paying for it,” Larkin added. “If there are more coming there will be big penalties to the municipal debt issuers, all the way up the state level.”

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