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Bills, few options mean bankruptcy for city
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SAN BERNARDINO  (AP) — They cut spending, sold assets and even asked public employees to take a financial hit.

But budget woes still mounted for San Bernardino city officials. And by the beginning of this week, vendors hadn't been paid and cash was running out to make payroll, threatening to shut down the city.

That prompted elected officials in the city of 210,000 people to make the sudden move of authorizing the city attorney to seek federal bankruptcy protection, becoming the third California city poised to do so in less than two weeks.

"This city is in a dire financial situation," Interim City Manager Andrea Travis-Miller said in a statement Thursday. "While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline and that has brought us to a critical point."

The contentious vote Tuesday night took many by surprise and set the city apart from other California municipalities where such an action came only after months of consideration.

Bankruptcy experts say the decision in San Bernardino — some 60 miles east of Los Angeles — could sound an alarm to cities across the state and country that are grappling with weak property and sales tax revenues as their pension obligations continue to rise.

"People are waiting to see whether these are the exceptions to the rule or whether we have a new trend," said Jim Spiotto, a Chicago attorney who tracks municipal bankruptcies. "I do think it may be something of a wake-up call."

San Bernardino is facing a budget shortfall of about $45 million and annual deficits over the next five years. That's even after the city slashed the workforce by 20 percent over the past four years and negotiated $10 million in annual concessions from employees in each of the past three years.

The problems stem from weak property and sales tax revenues combined with escalating pension costs and a loss of state redevelopment funds, city officials said.

On Tuesday night, City Attorney James Penman told the City Council that budget officials had presented falsified documents for 13 of the past 16 years, masking the city's deficit.

He told reporters a day later that he believed an outside investigation was needed in February but had not realized the scope of the problem until this month.

Evidence of financial mismanagement had been given to "appropriate government agencies," he said, declining to provide further details while citing the pending bankruptcy proceedings.

"The information was discovered in probably the last 60 days, and the elected officials became aware of it very recently," Penman said.

San Bernardino County sheriff's officials said Thursday they are working with police and the district attorney's office to investigate possible criminal activity within the city's government.

Sheriff-Coroner Rod Hoops said the investigation began at the request of city officials several months ago. It's unclear if the investigation relates to the bankruptcy or falsified documents. Hoops declined to release any details.

Jim Morris, the mayor's chief of staff, said some inaccuracies in past budget reporting diminished the size of the problem, but he did not believe officials deliberately misrepresented the data.

Four council members voted for the bankruptcy authorization, two opposed it, and one abstained.

Penman said the city is likely to declare a financial emergency Monday. That could exempt San Bernardino from a 60-day mediation period required under state law prior to a Chapter 9 bankruptcy filing.

In the meantime, city officials are preparing a short-term budget to continue operations. Penman could file for bankruptcy within the next 30 days, the city's statement said.

Marcus Nelson, owner of a local barber shop, wasn't surprised by the announcement, noting there are only three businesses on his block.

"It is kinda scary, knowing that the city doesn't have money," the 40-year-old said. "Small businesses know we can't make money."

On Thursday, the city's police chief and acting fire chief said they were confident they could continue to handle emergencies despite potential staffing cuts.

"You'll continue to see police officers and firefighters responding to calls day and night," Police Chief Robert Hardy said, despite an expected hiring freeze and the loss of some veterans through retirement.

The 458-member Police Department will need to alter some community-based policing programs adopted during more prosperous times, he said.

San Bernardino, which soared economically during the housing boom and suffered since the bust, could become the second largest city in the nation ever to file for bankruptcy. Stockton, the Northern California city of nearly 300,000, became the biggest when it filed for Chapter 9 on June 28. The much smaller city of Mammoth Lakes voted for bankruptcy July 3.

Those two cities used a new state mediation process to contemplate bankruptcy over a period of several months — a stark contrast to San Bernardino's quick-fire decision under a dire cash crunch.

Before Stockton, a California city had not filed for bankruptcy since Vallejo in 2008.

Jerry Newfarmer, president of government consulting firm Management Partners, said some of California's most financially stressed cities are inland, where housing prices plummeted. But he said many municipalities made tough cuts ahead of time, and he doesn't foresee a flood of new bankruptcies.

In the counties that are home to Stockton and San Bernardino, the share of homes in some stage of foreclosure was more than three times the national average in 2011, according to foreclosure listing firm RealtyTrac.

Since Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, about 640 government entities have filed. About half of states allow cities to seek bankruptcy protection, which is considered a measure of last resort because it can raise cities' borrowing costs, Spiotto said.

For many years, municipalities muddled through tough financial times with support from states, and in places such as Michigan, some are still doing so.

"I think this cries out for the need for increased oversight and the ability to provide forms of bridge financing to work through it," Spiotto said.