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California Mayor Asks for Prayers as Bankruptcy Looms

Atwater, California, is going broke under the weight of public employee costs, lost revenue and a stagnant economy, pushing it toward becoming the state’s fourth city to seek bankruptcy protection.

The city of 28,000, situated among Merced County’s dairies and almond groves about 100 miles (about 160 kilometers) southeast of San Francisco, has a $3.3 million deficit that may leave it insolvent before year’s end, according to budget documents.

Atwater’s City Council is set to vote Oct. 3 on a fiscal emergency declaration that would permit it to follow other California cities -- Stockton, San Bernardino and Mammoth Lakes -- into bankruptcy court. Across the state, the recession and the foreclosure crisis have depleted property-tax revenue at the same time municipalities are burdened with rising costs including pensions.

“We are in a tough spot,” Mayor Joan Faul, 71, said by telephone. “All I can say, sir, is keep us in your prayers. We will need it.”

The city’s economy since World War II was centered on the region’s agriculture and nearby Castle Air Force Base, the home of B-52 bombers. Castle closed in 1995 after the end of the Cold War, taking thousands of jobs with it.

The median household income in 2010 was $42,226, 19 percent below the national average of $51,914. Almost a fourth of the population is considered below the poverty line, compared with 13.7 percent statewide, according to U.S. Census figures.

Housing Crash

The housing crash cut Atwater’s median home price by more than half, to $140,000 in the fiscal year that ended in June from $336,000 in the same period in 2007. Unemployment surged to 21 percent. That helped send the city’s tax revenue plummeting more than one-fifth since 2007.

The loss of local redevelopment funds to the state also has squeezed the city, Faul said. Governor Jerry Brown killed redevelopment programs statewide and redirected their tax funds to cut the state’s deficit.

Atwater’s public employee pensions and retirement costs also are on the rise. The city’s contribution rate to the California Public Employees’ Retirement System rose after the fund suffered a record loss of 23.4 percent in 2009.

Under labor contracts, the city pays all of an employee’s 8 percent mandatory contribution for pension costs and 7 percentage points of the 9 percent for police and firefighters. Health-care premiums for city workers increased by 15 percent in 2011 and are forecast to jump 10 percent next year.

To help balance the books, Atwater has mostly depleted its cash reserves, fired 30 percent of its 120 workers since 2008 and may need to trim another third, Faul said.

Union Talks

The city is in talks with unions for concessions from police officers and rank-and-file city workers, Faul said.

“We just started negotiating with our unions and they are going to have to take a major cut,” Faul said. “We hope that once we declare a fiscal emergency, that they will realize that we are definitely in an emergency. If they want to save all the jobs, everyone is going to have to take a cut.”

To make matter worse, the city is facing a $2 million payment on municipal bonds in November, according to the budget documents.

Standard and Poor’s lowered its underlying rating on the Atwater Public Financing Authority’s wastewater revenue bonds to BBB- from A on Sept. 24, citing the city’s potential move toward bankruptcy.

Under a law signed by Brown last year, cities seeking bankruptcy protection must first declare a fiscal emergency or hold talks with creditors through a mediator. Municipalities can file for court protection if mediation doesn’t bring a resolution in 60 days or if the city runs out of money.

The law was sought by public-employee unions after Vallejo, a city of 120,000 in the San Francisco Bay area, went bankrupt in 2008 and asked a court to help it void labor contracts.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

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

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