Hot on the heels of Stockton, Calif. becoming the largest U.S. city to declare bankruptcy, the far smaller hamlet of Mammoth Lakes has headed for Chapter 9, the municipal equivalent of Chapter 11. Mammoth Lakes is much smaller than Stockton — just south of 8,000 residents, versus 300,000 — but it used the same state-mandated mediation process to work things out with its creditors prior to declaring bankruptcy.
Mammoth Lakes was dealing with $2.8-million budget deficit, also much smaller than Stockton's $26-million gap, but still a gap. However, the real problem for Mammoth Lakes was a $43-million court settlement on a breach-of-contract with a developer, on a deal that dated to 1997. True, Mammoth Lakes was hit by the same housing downturn that crushed Stockton's finances, with the main difference being that Mammoth Lakes is a ski destination where second homes and condos can be appealing, while Stockton was trying to become a bedroom community for the San Francisco Bay area — a primary-home market.
Mediation for Stockton, as I pointed out on a segment I did yesterday on MSBNC's "Weekends with Alex Witt," amounted to a "prepack," in bankruptcy terms. It cost $3 million and ultimately failed. But it served the purpose of preparing Stockton, its bondholders, and creditors such as CalPERS to maybe — and it's a big maybe — to move through bankruptcy much faster than Vallejo, which just exited Chapter 9 last year, after three years and $10 million in costs.
Stockton was only able to get a third of its creditors to agree to settle debts without going to court. Mammoth Lakes, by contrast, had successfully worked out deals with most of its creditors, as this website that the city established shows. Unfortunately, "Mammoth Lakes Land Acquisition," the developer that Mammoth Lakes contracted with in 1997, refused to participate in mediation. (There was a fair amount of legal back-and-forth that preceded the stalemate.)
MLLA thought the bankruptcy was pretty much a done deal anyway, as the New York Times reported in April:
Mark Rosenthal, a manager at Mammoth Lakes Land Acquisition, said the company believed that the town had no alternative to filing for bankruptcy. “We just think that mediation will delay the inevitable,” he said in an interview.
[A letter sent to the city] also reiterated the developer’s last offer to the town: an initial payment of $2 million, followed by annual payments of $2 million over 30 years. The developer, which released the letter to the local news media, said it was making it public to “open the process to all the constituents in the town.”
Mammoth Lakes has an annual budget of only about $17 million, so one can see how that agreement might have created stress.
Second town to declare bankruptcy in California in less than a week. Who's next?