Explaining Southern California's economy

A Q&A on the San Bernardino bankruptcy

berdoo bankrupt

Steven Cuevas / KPCC

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.

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Mammoth Lakes bankruptcy: Another debt-mediation failure

Mammoth Lakes

BasicGov/Flickr/Creative Commons

The city of Mammoth Lakes. The ski town will declare bankruptcy after efforts to negotiate payment terms for a $43-million legal judgment broke down.

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.

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Moody's called bankrupt Stockton's debt 'low' last year

Stockton, CA Leads Nation In Rate Of Foreclosures

Justin Sullivan/Getty Images

A sign is seen in a deserted section of downtown Stockton. The city will declare bankruptcy, becoming the largest U.S. city ever to do so.

The headline story is that Stockton, Calif. is now the largest U.S. city to file for bankruptcy. The Northern California municipality failed to come to terms with its creditors during a state-mandated mediation period and set in motion a filing for Chapter 9, the city-government version of Chapter 11. The total debt load has been reported as $700 million, although other sources have put it at somewhere between $500 million and a billion. 

Stockton's story is being widely presented as a sad case of a city that tried to expand into being a bedroom community for the San Francisco Bay Area and got hammered by a combination of a busted housing boom and city retiree pension and health-care obligations. The loss of property tax revenue and the cost of taking care of former firefighters and cops forced the city to borrow too much money, and the debt load eventually became too great.

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Let's hope Stockton can use mediation to avoid bankruptcy

Justin Sullivan/Getty Images

STOCKTON, CA - APRIL 29: Cars drive through downtown Stockton April 29, 2008 in Stockton, California. As the nation continues to see widespread home loan foreclosures, Stockton, .California led the nation with the highest foreclosure rate. One out of every 30 homes in Stockton is in foreclosure, close to seven times the national average for a metro area in the U.S. (Photo by Justin Sullivan/Getty Images)

The town of Stockton is lurching toward a Chapter 9 municipal bankruptcy. But thanks to a law that Gov. Jerry Brown recently signed, before a California municipality can head to bankruptcy court, it needs to submit to mediation. What this means is that the city and its creditors sit down a less formal environment than a court of law and try to iron out a solution. Generally speaking, this means that bondholders (for example) will accept a "haircut" on debt up front, rather than fighting it out on court.

If a mediation can lead to a successful resolution, it can be a real boon for the city that's in trouble. Bankruptcy is expensive. The lawyers have to be paid and the whole process has to be financed so that the municipality can continue to operate while its litigating. We're talking tens of millions of dollars.

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