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San Bernardino, California, Defers $6.4 Million Payments

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July 25 (Bloomberg) -- San Bernardino, the third California city to move toward a bankruptcy filing this year, will defer paying $3.4 million in pension bonds and $2.2 million toward retiree health care to tide it over before seeking court protection from creditors.

The city of 209,000, about 60 miles (100 kilometers) east of Los Angeles, suspended a total of $6.4 million in payments under an emergency budget adopted yesterday in a unanimous City Council vote.

Pressured by declines in property taxes and rising employee costs, as well as accounting irregularities, San Bernardino’s City Council voted July 10 to seek bankruptcy protection and followed up a week later by declaring a fiscal emergency. That lets San Bernardino bypass state-required mediation with creditors and proceed directly to U.S. Bankruptcy Court.

“It is certainly not a long-term solution,” interim City Manager Andrea Travis-Miller told the council. “This allows us to operate for a few months as we go to bankruptcy court. The things that we’re deferring will need to be paid at some point.”

The deferrals, together with a hiring freeze and employee concessions previously reached, will save $12 million over the next three months, Travis-Miller said. The city will need to cut long-term expenses by 30 percent to stay solvent, she said.

Officials didn’t say when the city planned to go to court. The filing is being held up by difficulty untangling previous budgets, said Gwen Waters, a city spokeswoman.

Bankruptcy ‘Purgatory’

Mayor Pat Morris called for a process “that doesn’t linger unnecessarily long in the purgatory of bankruptcy, so that our city is consumed in this Chapter 9 experience.”

If the city seeks protection, it would join California’s Stockton, an agricultural center of 292,000 east of San Francisco, and Mammoth Lakes, a mountain resort town of 8,200 south of Yosemite National Park. Mediation with creditors undertaken by both cities failed to produce agreements needed to keep them out of court.

The moves by Stockton, Mammoth Lakes and San Bernardino may undermine confidence in the credit of other California cities, state Controller John Chiang said by telephone before the meeting.

“We want to make sure that this doesn’t become a pervasive way of thinking,” Chiang said. “Bankruptcy should be a very, very last step.”

San Bernardino confronts a deficit that has reached $45.8 million on revenues of $120.4 million and would probably run out of money before the end of the negotiation period, according to the city’s fiscal emergency document. Revenues have dropped 9.8 percent since their peak in 2008, according to the document.

Credit Market

The city is unable to access the short-term credit market and that vendors are demanding up-front cash payments, according to the declaration. In addition to putting off payments for pensions, leases and retiree health care, the emergency budget would postpone all capital projects, maintain employee vacancies and continue employment concessions negotiated with unions.

The budget doesn’t envision immediate firings of workers.

On July 13, the San Bernardino County Sheriff’s Department said a probe of possible criminal activity in City Hall had begun several months earlier. Investigating agencies, which include the city police department and district attorney’s office, haven’t provided details of the investigation. No one has been charged with wrongdoing.

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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