California May See More Bankruptcies, Chiang Says

California may see more municipal bankruptcies than the three that have been filed since June, state Controller John Chiang said.

Municipal budgets already strained by surging pension costs and declining real-estate tax revenue were stripped of more than $1 billion in local redevelopment funds and vehicle-license fees to cut California’s deficit.

Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy protection in the past three months.

“We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said yesterday at a conference in San Francisco. “We need the state to participate in trying to prevent these bankruptcies.”

About 400 redevelopment agencies that helped finance projects to overcome blight were dissolved Feb. 1 by Governor Jerry Brown to redirect more than $1 billion of their funds to help fill a budget gap.

Stockton and San Bernardino officials have said the state raid on redevelopment funds helped push them into bankruptcy court. Mammoth Lakes traced its problems to an adverse court judgment.

Chiang pointed to recent financial distress in Jurupa Valley, Wildomar, Eastvale and Menifee in Riverside County. Those cities were all incorporated within the last five years. Under a state formula approved in 2006, extra license-fee money was directed to new cities to help them get established. Brown vetoed a bill to return funding to the cities yesterday, saying it would cost $18 million that the state couldn’t afford.

‘Huge’ Issues

“They’re having huge financial issues,” Chiang said in an interview after the conference. “The question is when you take one of their principal revenue sources, if not their principal revenue source, how are they going to sustain themselves?”

Frank Oviedo, city manager of Wildomar, a city of 32,000, disputed Chiang’s assessment.

“There’s not an imminent danger of bankruptcy in Wildomar,” he said by telephone. “Certainly, the loss of the vehicle-license fee has been a huge hit to our general fund and has made it difficult for us to provide public safety in our community.”

Eastvale City Manager Carol Jacobs said her city of 55,000, incorporated in 2010, lost about $3 million, or a third of its annual revenue, in the vehicle tax switch.

State Promise

“The city based its future financial health and well-being on the promise of the state giving us that vehicle-license fee,” Jacobs said in an interview. “Whether or not we go under or bankrupt, I don’t know.”

In Menifee, while the loss of the vehicle-license fee revenue has affected the community, bankruptcy “is not something we’re contemplating at this time,” Terri Willoughby, the city’s finance director, said by telephone.

Chiang said his office is conducting audits of cities and counties that took over bond obligations when the redevelopment agencies were shuttered.

“Many of them are close to the margin of going off the fiscal cliff,” Chiang said, without offering details.

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net

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

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