(Bloomberg News) San Bernardino, California, filed for municipal bankruptcy after disclosing a $46 million budget shortfall and a criminal investigation of some of its departments.
San Bernardino listed assets and debt of more than $1 billion in a filing today with U.S. Bankruptcy Court in Riverside, California. It's the third California community to seek court protection from creditors in just over a month.
City officials sped up the timing of its filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over.
"All of our vital service bills will continue to be paid," Morris said. "We are going to keep our city services running."
San Bernardino, a city of 209,000 about 60 miles (97 kilometers) east of Los Angeles, has reduced its workforce by 20 percent in the past four years and negotiated labor cuts valued at about $10 million annually, according to a June 26 budget analysis posted on its website.
The city faces insolvency because of accounting errors, deficit spending, pension and debt costs, and lack of revenue growth, according to the report.
As property values plunged as part of the housing crisis, the city's tax revenue fell also. In 2008, the city's general fund, which is used to pay for most of its basic services, like police and fire protection, peaked with $133 million in revenue. This fiscal year, which started July 1, the fund will bring in $120 million in revenue. The preliminary budget calls for spending of $166.2 million, leaving the city short by about $46 million, according to a July 23 budget document.
The past two fiscal years, city official reported having more money in their general fund than they actually had. In the fiscal year that ended June 30, city officials reported a balance of $2 million, when there was actually a deficit of $1.2 million, according to the report.
The San Bernardino County sheriff's office announced a criminal investigation of the city on July 12, two days after the city council, which is separate from the county, voted to opt for bankruptcy.
The sheriff's announcement didn't say whether the investigation was related to the city's finances. It referred to "allegations of criminal activity within departments of the San Bernardino city government."
Sheriff Rod Hoops has said in media interviews that he doesn't know of any connection between the investigation and the city's financial crisis, sheriff's spokeswoman Jodi Miller said in a phone interview.
Stockton, Mammoth Lakes
Stockton, California, a community of 292,000 east of San Francisco, on June 28 became the biggest U.S. city to file for bankruptcy. Mammoth Lakes, a mountain resort of 8,200, sought protection from creditors on July 3, saying it couldn't afford to pay a $43 million judgment.
San Bernardino officials asked the city council on July 24 to defer paying any debt payments due from July 1 to Sept. 30.
The city has about $55.9 million in bond debt tied to the general fund. The city also has unfunded liabilities of $296 million, including $195 million related to pensions and $61 million related to medical benefits for retired city workers.
Interim City Manager Andrea Travis-Miller proposed putting off $3.56 million in payments due pension bondholders and bank lenders and $2.22 million owed for retiree health care.
"Unfortunately these measures are intended to enable the city to meet its obligations over a three-month period and will not result in a sustainable, balanced budget," Travis-Miller write in her memo to the city council.
She is preparing a longer-term budget that will be implemented while in bankruptcy that would cut spending by about 30 percent.
The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).