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A deserted section of downtown Stockton. The bankrupt California city has shown a willingness to default on its debt, according to Moody's.
With four California cities in the past two months either declaring bankruptcy (Stockton, Mammoth Lakes, and for all practical purposes San Bernardino) or making noises about declaring bankruptcy (Compton), it's easy to conclude that we're on the leading edge of a wave of Chapter 9s that will sweep across the state.
But the fact is that municipal bankruptcies are exceptionally rare. This is one of the attractions of the $3.7-trillion municipal bond market, which hasn't been signaling a wave of cities going bust, nor steeply discounting the debts of cities that are broke (cities in bankruptcy don't have to default on their debts — they can keep right on paying as they move through Chapter 9).
However, Moody's, one of the big U.S. rating agencies. put out a report yesterday titled "Recent Local Government Defaults and Bankruptcies May Indicate A Shift in Willingness to Pay Debt." In it, the Moody's analysts write that they "expect the vast majority of rated municipalities" — and for Moody's that's 8,500 cities — to "muddle through and pay their debts."
San Bernardino Councilman Rikke Van Johnson explains municipal bankruptcy process at a town hall meeting last week. What role has the loss of redevelopment money played in the city's fiscal crisis?
The San Bernardino City Council is expected to vote tonight to declare a fiscal emergency, enabling the Inland Empire municipality to proceed directly to Chapter 9 bankruptcy without passing the 90-day state-mandated "Go" of mediation with its creditors. I've been reporting on how San Bernardino wound up with a fiscal crisis — and why other California cities may be staring down the same nightmare scenario.
But one thing that has city officials particularly enraged in San Bernardino is the loss of state redevelopment money. Last year, Gov. Jerry Brown and the state legislature took back money that had been going to redevelopment agencies to close the state's massive budget deficit. The total loss to cities? Around $6 billion.
The move — which was fought by the redevelopment agencies and got all the way to the California Supreme Court, where the new law was upheld — hit San Bernardino hard.
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San Bernardino City Hall. In 2010, the City Council was warned that bankruptcy was on the horizon.
A former San Bernardino City Council member, Tobin Brinker, commented on my post from yesterday about the bond markets being taken by surprise by the Inland Empire municipality's vote this week to become the third California city to declare bankruptcy. The one-time representative of the city's third ward wrote about a council meeting that took place in 2010:
[C]ity Treasurer David Kennedy spoke and explained the city had lost $40 million dollars in its investment pool in the previous three years. If major changes aren't made he will not be able to certify that the city can meet its payroll for the next six months. He was the first person to mention BANKRUPTCY. The City Finance Director Barbara Pachon spoke and shared a slide titled "Symptoms of Bankruptcy." She informed council members that we unfortunately meet all of the symptoms....
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San Bernardino City Hall. The city's fiscal crisis could make its possible bankruptcy far worse than Stockton's.
The San Bernardino City Council voted last night to prepare to file bankruptcy. If the Inland Empire city does enter Chapter 9, it would be the third California municipality to do so this year, following Stockton and Mammoth Lakes.
But according to the bankruptcy lawyer who helped draft AB 506, the new California law that compels cities considering bankruptcy to first submit to a "neutral evaluation" process, and an economist who studies the Inland Empire, San Bernardino could look a lot worse than either of the cities that have already filed for Chapter 9.
"The San Bernardino situation is extremely challenging," said Karol Denniston of Schiff Hardin in San Francisco. "They don't seem to have considered the 506 process."
A call to an aide to Mayor Patrick Morris to determine whether San Bernardino had considered going through mediation was not returned. [UPDATE: The mayor's Chief of Staff, Jim Morris, got back to me late Wednesday to explain that the city had considered the mediation requirement and is working with bankruptcy attorneys to ensure that the city is complying with state law. He also said that a fiscal emergency hasn't yet been declared but that it could soon be, in reponse to what he described as San Bernardino's cashflow crisis.]
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San Bernardino city council caps a 3-hour budget hearing by grimly approving authorization for Chapter 9 bankruptcy protection. What would bankruptcy mean for the city of more than 200,000?
Last night, the San Bernardino City Council voted to prepare for a bankruptcy filing. If the city of 211,000 does enter Chapter 9, it would follow Stockton and Mammoth Lakes, both of which have turned over their finances to the courts in recent weeks after a new state-mandated mediation process failed to resolve heavy debt burdens and, in Mammoth Lakes' case, a legal judgment that was more than double the city's budget. San Bernardino would also be the second U.S. city of more than 200,000 to enter bankruptcy.
So what would bankruptcy mean for San Bernardino? I've created a Q&A that I'll follow up with some more in-depth reporting on San Bernardino's specific problems.
Q: Can San Bernardino declare bankruptcy right away?
A: It's unclear. A new California law requires municipalities to declare a fiscal emergency — San Bernardino says that it can't make its city payroll, which definitely qualifies — and enter a mediation period before officially filing for Chapter 9. In Stockton's case, this consumed about 90 days but was ultimately unsuccessful. In a July 26 analysis of the city's dire finances, the mediation process was referenced.