California Town Aiming to Rival Vail Faces Upheaval

When an earthquake jolted Mammoth Lakes, California, in 1980, it caused $1.5 million in damage and kindled fears of volcanic eruption that scared off visitors to what’s now the third-most-popular U.S. ski resort.

That pales in comparison with the latest troubles facing the High Sierra mountain town of 8,200. The second-lowest snowfall in 20 years kept tourists away in the 2011-2012 season. Home prices are down one-quarter from their peak and a $43 million breach-of-contract judgment threatens to wipe the municipal government off the map.

Mammoth Lakes, about 250 miles (400 kilometers) north of Los Angeles, was the second California municipality to seek bankruptcy protection in as many weeks. It followed Stockton, which was battered by rising employee costs and falling property values. While Mammoth Lakes’s circumstances are different, the move into court may encourage other struggling municipalities to take the same step, said Lisa Greer Quateman, a Los Angeles lawyer.

“What we’re seeing here is another domino in the lessening stigma of municipal bankruptcy,” said Quateman, a specialist in such restructurings at Polsinelli Shughart PC. “Decisionmakers rely on precedent, and there’s very little precedent for something like this.”

Ski Resort

Mammoth Lakes, at an elevation of about 7,900 feet (2,400 meters) and surrounded by mountains rising to as much as 11,000 feet, owes its livelihood to Mammoth Mountain Ski Area. As recently as 2005, when the resort was sold for $365 million to a buyout group led by Barry Sternlicht, the founder of Starwood Hotels & Resorts Worldwide Inc., real-estate investors were bidding on area properties sight-unseen in hopes the region might one day rival Vail or Aspen, the Colorado ski meccas.

Yesterday, actor Tom Cruise, fresh off his divorce settlement with actress Katie Holmes, arrived in Mammoth Lakes to continue filming the movie “Oblivion,” reported.

Mammoth Lakes’ resort-town economy sets it apart from Stockton, a city of 292,000, as well as from Vallejo, the city on San Francisco Bay that emerged from court supervision in 2011. What else distinguishes the town is the cause of its bankruptcy, a $43 million judgment from a lawsuit brought by a developer in 2006.

Legal Decision

Mammoth Lakes Land Acquisition LLC accused the municipality of reneging on an agreement giving it the rights to build a hotel and condominiums near Mammoth Yosemite Airport. The judgment, upheld on appeal, is more than twice the town’s $19 million general-fund spending for the year that began July 1. It’s the second time a California community has sought bankruptcy because of a legal decision it couldn’t afford, after Desert Hot Springs in 2001.

Mammoth Land has proposed that the town pay $2.7 million a year for 30 years, according to the developer’s lawyer, Daniel L. Brockett, a partner at Quinn Emanuel Urquhart & Sullivan LLP in New York. The town, whose offices are in a shopping center that houses the community’s only grocery store, can’t afford more than $500,000 a year without decimating services such as police and snow removal, Assistant Manager Marianna Marysheva-Martinez said in an interview.

With tourism at its heart, the day after filing for Chapter 9 protection in a federal bankruptcy court in Sacramento, Mammoth Lakes went ahead with its annual Fourth of July fireworks show at a cost to the town of $25,000. The event drew hundreds of visitors such as Roger Noll, a professor emeritus of economics at Stanford University, who has split his time between Palo Alto and Mammoth Lakes since 1976.

‘The Pits’

“You’re here at probably the worst time” since the volcano scare, Noll told a reporter. “This is the pits.”

Town officials made a deal in 1997 with developer Terrence Ballas to expand and modernize the airport and build a hotel, gas station, restaurant, condominiums and a recreational vehicle park. After the deal was stalled by an environmental lawsuit, the town backed out in 2004 when the Federal Aviation Administration, which was financing airport improvements, said the development plan was incompatible, said Charles Long, who was the interim town manager at the time.

Mammoth Lakes Land Acquisition sued and won a judgment for $30 million. The developers’ lawyer, Brockett, said the project would have prospered if it had gone ahead. He said the jury award was based on projected earnings of $185 million. The judgment grew to $43 million as the town exhausted its appeals.

Cutting Pay

Mammoth Lakes closed a $2.8 million budget gap this year, in part by cutting employee pay more than 10 percent. The town has trimmed its workforce to 70 from 130 since 2007, and it must eliminate a police officer’s job this month to save money, Town Manager Dave Wilbrecht said. Paying Mammoth Land $2.7 million a year isn’t feasible, he said.

The median home-sale price between June 4, 2011, and July 4, 2012, was $560,000, down 24 percent from the same period in 2004-2005, according to calculations by Coldwell Banker Mammoth Real Estate agent Donna Lisa Knowles, using a sales database.

As property values fell, Mammoth Lakes became dependent on hotel taxes for 61 percent of its general-fund revenue, the highest percentage in California. Below-average snowfall this season and a tighter economy depressed visits to the resort, lowering projected hotel taxes to $9.6 million for the year that began in July, from $10.7 million in the year that ended June 2008, according to town budget documents and Marysheva-Martinez.

Vail, Breckenridge

Mammoth Mountain, the third-most-visited U.S. ski resort behind Vail and Breckenridge, in Colorado, had 950,000 skier visits in the past ski season, down from an average of 1.3 million, said Joani Lynch, a resort spokeswoman.

The resort, owned by Mammoth Mountain Ski Area LLC, doesn’t expect any effect from the town’s bankruptcy, Lynch said by e-mail. Nor will it affect Noll’s decision to keep his condo near the center of town, he said as the fireworks were about to begin.

“I’m not here for investment purposes,” Noll said. “I’m here for -- look around. This is one of the best places on the planet to be. Look at it. It’s gorgeous.”

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