California’s Desert Hot Springs Holds Short of Bankruptcy

The City Council in the resort town of Desert Hot Springs, California, urged by aides to begin steps toward bankruptcy, stopped short yesterday, saying it may avoid running out of cash by finding savings to stay solvent.

The city of 26,000 people and 16 boutique mineral spas near Palm Springs will be out of cash by March 31, according to Amy Aguer, the interim finance director. She said the council should declare a fiscal emergency, a prerequisite under state law before seeking court protection.

“It’s too drastic to consider,” Mayor-elect Adam Sanchez, a 55-year-old Democrat, said in an interview. “There’s room in this city budget to make the cuts that are necessary without going bankrupt.”

Desert Hot Springs would be the first community to seek court protection since Detroit did so in July. Two other California cities are in bankruptcy: San Bernardino, with a population of 210,000, and Stockton, whose 292,000 residents made it the biggest municipal case until Detroit.

If it seeks Chapter 9 protection, Desert Hot Springs, about 110 miles (177 kilometers) east of Los Angeles, would be making its second pitch to a bankruptcy judge since 2001, when it couldn’t afford to pay a legal judgment. The city exited bankruptcy in 2004.

Bankruptcy, Again

“Bankruptcies and defaults by general governments are so rare that when they happen, it has an outsized effect, with or without press attention,” said Matt Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts, in an interview before yesterday’s council meeting.

“Cities that file for bankruptcy seem to file for bankruptcy again, more than other cities,” he said. “That’s a cautionary tale for Detroit as they go through this.”

Desert Hot Springs has $18 million in debt: $8 million in certificates of participation and $10 million in bonds to repay the legal judgment that drove the city to seek protection from creditors 12 years ago.

San Bernardino, whose council voted for bankruptcy in August 2012, and Stockton, which filed in June 2012, both cited falling property-tax revenue from the housing-market collapse, as well as rising labor and pension costs.

Aguer, Desert Hot Springs’s top fiscal officer since July, said in an interview that the city’s problems stem less from external factors than from “optimistic” projections by previous city officials.

Desert Hot Springs last filed for bankruptcy in 2001, saying it couldn’t pay a legal judgment of almost $6 million awarded to a mobile-home-park developer that had been denied permits for a project in the city.

Before it's here, it's on the Bloomberg Terminal.