San Bernardino Postpones Emergency Vote on Bankruptcy

San Bernardino, the California community whose government is the subject of a criminal probe, postponed declaring a fiscal emergency, a step needed to seek bankruptcy court protection without a mediation period.

The City Council in the community of about 209,000 residents east of Los Angeles put off the declaration yesterday while agreeing to start formal contract negotiations with its public-employee unions. Confronted by a $45 million budget gap and depleted coffers, the council decided on bankruptcy July 10.

“The pond is incredibly shallow,” Mayor Patrick Morris told the council in urging them to act quickly on seeking court protection. He said the city risks running out of money to pay employees as soon as Aug. 15.

Without an emergency, a new labor-backed state law requires a 60- to 90-day mediation with creditors including unions before a court filing. San Bernardino would become the third California city to enter bankruptcy this year, after Stockton and Mammoth Lakes, should it take that step. Neither of those communities succeeded in staving off a Chapter 9 filing through negotiation.

Councilwoman Wendy McCammack urged colleagues to postpone the emergency vote, saying it wasn’t clear how municipal cash had been shifted from restricted accounts to the general fund that pays for police, fire and other basic services.

“It’s not transparent and it’s not representative of what the public expects,” McCammack said.

Criminal Probe

An investigation into possible criminal activity within the city government was begun “several months ago” at the request of local officials, according to the San Bernardino County sheriff in a statement last week. No further details have been disclosed in the probe, which also involves the county district attorney and city police.

In a bankruptcy, about $152 million of San Bernardino’s $223 million in long-term bonds “should be unimpaired,” Municipal Market Advisors said yesterday in a note to investors, citing revenue backing the debt from dedicated sources such as water and sewer services.

About $48 million in pension-obligation securities, $12.4 million in lease-revenue bonds and $11.5 million in certificates of participation may be “at greater risk of adjustment” during the legal process, according to the note from the Concord, Massachusetts-based research company.

To contact the reporter on this story: James Nash in San Bernardino, California at jnash24@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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