San Bernardino, California, Files Chapter 9 Bankruptcy

San Bernardino, California, filed for municipal bankruptcy after disclosing a $46 million shortfall in the city’s budget, the third California city to seek court protection from creditors since June 28.

California cities from the Mexican border to San Francisco Bay are confronting rising pension costs as they contend with growing unemployment and declining property- and sales-tax revenue. The costs stem from decisions made when stock markets were soaring and retirement funds were running surpluses.

San Bernardino officials sped up the timing of the bankruptcy filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over.

The city was forced to seek court protection so abruptly because of actions by plaintiffs in three cases involving the San Bernardino Police Department, prompting the city to submit an “emergency filing,” according to an e-mailed statement from the San Bernardino city attorney’s office.

San Bernardino, a city of 209,000 about 60 miles (97 kilometers) east of Los Angeles, listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California.

“All of our vital service bills will continue to be paid,” Mayor Morris said. “We are going to keep our city services running.”

Pension Liabilities

Pension liabilities in the California cities of Fairfield, Inglewood, Pomona, San Bernardino, Stockton and Vallejo rose 6 percent to $4.3 billion for the year ending June 30, 2010, from $4.1 billion in 2009, according to the most recent data available from the California Public Employees’ Retirement System.

In the northern California municipality of Fairfield, near the Napa Valley winegrowing region, 18 percent of the general- fund budget goes toward pension costs, up from 14 percent in fiscal 2008, said David White, the deputy city manager.

Fairfield, Inglewood, Pomona and other California municipalities including Compton are on a list of cities “on the precipice” compiled by Matt Fabian, a managing director for Concord, Massachusetts-based Municipal Market Advisors, who cited news reports in identifying them in a July 23 research note.

Reduced Workforce

San Bernardino has reduced its workforce by 20 percent in the past four years and negotiated labor cuts valued at about $10 million annually, according to a June 26 budget analysis posted on its website.

One of the main problems is the high cost of the city’s union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview.

Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have more money to spend, Shorett said.

“We are set up for failure,” he said.

Steve Turner, with the city’s police union, and Richard Moss, with the fire union, didn’t return calls yesterday seeking comment on the bankruptcy filing.

Accounting Errors

The city faced insolvency because of accounting errors, deficit spending, pension and debt costs, and lack of revenue growth, according to the June 26 report.

As property values plunged as part of the housing crisis, the city’s tax revenue fell as well. In 2008, the city’s general fund, which is used to pay for most of its basic services, like police and fire protection, peaked with $133 million in revenue. This fiscal year, which started July 1, the fund will bring in $120 million in revenue. The preliminary budget calls for spending of $166.2 million, leaving the city short by about $46 million, according to a July 23 budget document.

The past two fiscal years, city officials reported having more money in their general fund than they actually had. In the fiscal year that ended June 30, city officials reported a balance of $2 million, when there was actually a deficit of $1.2 million, according to the report.

‘Criminal Activity’

The San Bernardino County sheriff’s office announced a criminal investigation of the city on July 12, two days after the city council, which is separate from the county, voted to pursue bankruptcy.

The sheriff’s announcement didn’t indicate whether the investigation was related to the city’s finances. It referred to “allegations of criminal activity within departments of the San Bernardino city government.”

Sheriff Rod Hoops has said in media interviews that he doesn’t know of any connection between the investigation and the city’s financial crisis, said Jodi Miller, a sheriff’s spokeswoman, in a phone interview.

Stockton, California, a community of 292,000 east of San Francisco, on June 28 became the biggest U.S. city to file for bankruptcy. Mammoth Lakes, a mountain resort of 8,200, sought protection from creditors on July 3, saying it couldn’t afford to pay a $43 million judgment.

San Bernardino officials asked the city council on July 24 to defer any debt payments due from July 1 to Sept. 30.

Bond Debt

The city has about $55.9 million in bond debt tied to the general fund. The city also has unfunded liabilities of $296 million, including $195 million related to pensions and $61 million related to medical benefits for retired city workers.

Interim City Manager Andrea Travis-Miller proposed putting off $3.56 million in payments due pension bondholders and bank lenders and $2.22 million owed for retiree health care.

“Unfortunately these measures are intended to enable the city to meet its obligations over a three-month period and will not result in a sustainable, balanced budget,” Travis-Miller wrote in her memo to the city council.

She is preparing a longer-term budget that will be implemented while in bankruptcy that would cut spending by about 30 percent.

Bond Prices

Taxable Build America Bonds sold by the San Bernardino Joint Powers Financing Authority in December 2010 and maturing in 2030 traded Aug. 1 at an average yield of 9.08 percent, up from a 2012 low of 7 percent on March 23, data compiled by Bloomberg show.

A day after the bankruptcy filing, yields on 30-year tax- exempts were down 0.01 percentage point to 2.89 percent at 11 a.m. in New York, according to data compiled by Bloomberg. Prices move in the opposite direction of yields.

“The filing happened quicker than the market assumed, but it was still expected to happen so it wasn’t a surprise,” Jason Hannon, a trader at New-York based Arbor Research & Trading Inc., said in a telephone interview.

The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net; Dawn McCarty in Wilmington at dmccarty@bloomberg.net; Michael Bathon in Wilmington at mbathon@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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