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City of San Bernardino, California, to vote on filing for bankruptcy

By Michael Martinez, CNN
updated 6:34 PM EDT, Wed July 18, 2012
The city of San Bernardino, California, is $45 million in the hole and may declare bankruptcy.
The city of San Bernardino, California, is $45 million in the hole and may declare bankruptcy.
STORY HIGHLIGHTS
  • San Bernardino is scheduled to vote on declaring a fiscal emergency
  • The city faces a $45 million shortfall as millions in revenues have evaporated
  • San Bernardino would be the third California city to go bankrupt in recent weeks

Los Angeles (CNN) -- The City Council of San Bernardino, California, is scheduled to vote late Wednesday on a resolution formally authorizing the filing of bankruptcy.

The council, scheduled to meet at 5 p.m., is to consider first another resolution declaring a fiscal emergency.

Last week, Interim City Manager Andrea Miller and Finance Director Jason Simpson issued a report stating that the city was facing insolvency and its expenditures are projected to exceed revenues by $45 million. The city's general fund reserves had been as high as $19 million in 2001 but are now depleted, the report said.

Some $10 million to $16 million in annual revenue has evaporated in recent years as taxable sales dried up and property values plummeted in the city of 211,000 residents, the report said. San Bernardino is about 60 miles east of downtown Los Angeles.

Prior agreements reducing city salaries are now ending, "creating an increase in salaries and benefits of $10 million effective July 1, 2012, and increased costs in future years as merit increases resume," the report said.

Despite negotiating tens of millions of dollars in concessions and reducing its work force by 20% over the past four years, San Bernardino would not have enough cash on hand to meet its obligations, according to the report.

"The city has reached a breaking point," the report said.

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San Bernardino would be the third California city to file for bankruptcy in the past few weeks. Many municipalities in the Golden State and around the nation are struggling to cover their costs as the economic malaise continues to hurt tax revenue streams, experts said. This will lead to more municipal bankruptcies, which have been rare until now.

"This is not the end. This is the beginning," Peter Navarro, business professor at University of California, Irvine, told CNN recently. "As cities see it can be done and is being done, it will give them the idea to do it."

The town of Mammoth Lakes, California, sought protection July 2 after a property developer won a $43 million court judgment against the resort town of just over 8,000 residents. Experts say this filing should not be lumped in with the other two California towns since it was an unusual circumstance.

The city of Stockton, however, filed for bankruptcy in late June after three months of mediation with creditors failed to close a $26 million budget shortfall. The city of 292,000 residents had already addressed $90 million in deficits over the past three years, mainly through reducing services and employee compensation.

Both Stockton's and San Bernardino's fiscal troubles are due in large part to the massive housing downturn and recession that swept across California. Both towns were hit particularly hard by the foreclosure crisis, which left numerous abandoned homes and reduced property values in its wake. That led to lower property tax revenues, critical to supporting public services.

Also, municipalities have struggled from budget changes made on the state level. Because of massive budget shortfalls, Gov. Jerry Brown and the state legislature made changes to vehicle tax money allocation and redevelopment agencies that stripped locales of hundreds of millions in state funding.

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While some areas of the Golden State are starting to recover, the regions containing those two towns are not, said Chris McKenna, executive director of the League of California Cities.

By filing for bankruptcy, cities will be able to keep police and firefighters on the street and possibly keep some parks and libraries open while they work out their finances, he said.

More municipal bankruptcies are likely in California and throughout the nation, as cities continue to battle rising costs and a weak economy, said Eric Hoffman, an analyst at Moody's Investors Service.

CNNMoney's Tami Luhby contributed to this report.

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