The city council of San Bernardino, California, voted on Tuesday to file for bankruptcy, marking the third time in recent weeks a city in the most populous U.S. state has opted to seek protection from its creditors.
The decision by the leaders of San Bernardino, a city of about 210,000 residents approximately 65 miles east of Los Angeles, followed a report by city staff that said the city faced an imminent financial crisis.
The report said the city had exhausted its reserves and projected spending would exceed revenue by $45 million in the current fiscal year which started on July 1.
Chapter 9 bankruptcy would give San Bernardino an opportunity to restructure its battered finances, city staff said during a webcast of the city council meeting.
But the council's vote may backfire on San Bernardino in the municipal debt market, and raises concerns about local officials in California potentially looking to bankruptcy protection as an easier solution than making tough decisions about spending cuts and raising revenue, said Dick Larkin, director of credit analysis at muni bond broker-dealer HJ Sims.
"Am I troubled? You bet," said Larkin. "I couldn't believe how quickly this vote happened."
Larkin noted the concerns of San Bernardino's staff about the risk of the city not meeting its payroll in coming months may be eclipsed by concerns it could be frozen out of the muni debt market if it goes through with a bankruptcy filing.
It may take San Bernardino 30 days to complete the actual filing, according to its city attorney.
"I hope California isn't becoming the flashpoint for municipal bankruptcy because if that happens then everyone in the state will be paying for it," Larkin added. "If there are more coming, there will be big penalties to (municipal debt) issuers in California, all the way up the state level."
San Bernardino will join the California communities of Stockton and Mammoth Lakes in bankruptcy court.
Stockton failed after three months of talks with its creditors to obtain concessions to close its $26 million budget gap and the city of nearly 300,000 in the state's Central Valley last month became the most populous U.S. city to file for bankruptcy.
Mammoth Lakes, a ski resort town of about 8,000 residents, last week filed for bankruptcy due to a nearly $43 million legal judgment against it.
Like Stockton, San Bernardino has suffered from the housing crash and high unemployment. According to the report to its city council, the city "has reached a breaking point and faces the reality of deficient cash on hand to meet its contractual and debt obligations due in July 2012."
"The city has declared numerous fiscal emergencies based on fiscal circumstances and has negotiated and imposed concessions of $10 million per year and has reduced the workforce by 20 percent over the past four years," the report said.
"Yet, the city is still facing the possibility of insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth, and increases in pension and debt costs."