Saint Bernardino

Keeping in mind Ronald Reagan’s old motto, Bankrupt San Bernardino, California, officials said in a status report released Friday that they’ve eliminated about $29 million from the city’s budget deficit, and are making progress “toward fiscal stability.”

City administrators also asked a U.S. bankruptcy judge supervising their Chapter 9 case in Riverside to set a status conference within 45 days to help resolve objections to their decision to seek court supervision. “The city has made expenditure reductions that substantially reduce its staggering $48.5 million budget deficit,” resulting in “a remaining projected budget deficit of about $16.03 million for the current fiscal year,” according to City Attorney Paul Glassman in the eight-page report. Counselor Glassman wrote that city staff “are diligently working” to develop a plan for a balanced budget for this fiscal year. Among the cost savings were budget cuts, “revenue offsets” and “adjusted net transfers.” The city also said it saved money by deferring payments to the California Public Employees’ Retirement System—likely the city’s biggest creditor. San Bernardino was granted extra time by U.S. Bankruptcy Judge Meredith Jury to make its case for bankruptcy at a hearing held Monday. The city’s attorneys have filed a status report asking that the city receive more time to file a pendency plan, which the judge has granted until Dec. 21^st to hear arguments about whether the city should be eligible for bankruptcy—giving the city until Nov. 30 to respond to objections to its eligibility for bankruptcy from California Public Employees’ Retirement System and a city employees union. In the city’s brief, the city argued: “While the city has made expenditure reductions that substantially reduce its staggering $45.8 million budget deficit, the city still faces a severe cash flow crisis and structural budget imbalance….Absent Chapter 9 protection, the city would be unable to pay its employees, go into uncontrolled default of its obligations for critical city assets such as police cars, fire trucks, and refuse trucks, and could not provide basic essential services to ensure the health, safety and welfare of its citizens.” The city has made $29.7 million in cuts reducing the projected deficit for the current fiscal year to $16.03 million, according to court documents. Some consider the standard for eligibility under fiscal emergency to be that a city was managing itself well, but events beyond its control created a situation where it could not pay its bills. San Bernardino will have to convince the judge that was the case for the city when it made an end run around AB506, the state law that requires cities to go through a mediation process with creditors before declaring bankruptcy.

San Bernardino is not only making itself a test case for when a city should be eligible to file bankruptcy, but also whether or not payments to the California Public Employees’ Retirement System (CalPERS) can be negotiated. Moody’s late last week warned that that San Bernardino’s and Compton’s disputes with the pension “could open the door for courts to decide whether pension contributions can be legally suspended or modified if a California local government is in financial distress/and or bankruptcy.” San Bernardino has missed $5.3 million in payments to CalPERS since July. Compton owes the pension fund $2.6 million, but the city plans to catch-up on its payments in December through efforts including the issuance of a $10 million TRAN, according to its City Manager Harold Duffey. Before San Bernardino’s CalPERS payment suspension, the bankrupt cities of Vallejo and, more recently, Stockton had left their obligations to CalPERS unimpaired at the expense of unsecured creditors including bondholders. The judge in the Stockton bankruptcy did uphold the city’s right to stop paying health benefits to city retirees, according to the Moody’s report. San Bernardino has about $90 million of outstanding pension obligation bond debts and owes another $200 million for securities issued by the city’s now-dissolved redevelopment agency. The city missed a $3.3 million pension obligation bond payment on July 31. The city also failed to make a $1 million interest payment due Oct. 1 on 2005 taxable pension bonds. Moody’s, in its report, noted that San Bernardino’s and Compton’s disputes with CalPERS could have ramifications for other cities and their creditors: “These situations could open the door for courts to decide whether pension payments can be legally suspended or modified if a California local government is in financial distress and/or bankruptcy:” warning that if the financially troubled cities succeed in delaying or reducing their CalPERS payments, it “could incentivize other financially distressed cities to seek concessions from all creditors;” on the other hand, if cities are not required to make full pension payments while in bankruptcy, the report said, more might be left for other creditors, including bondholders. As of the end of last week, the city owed nearly $5 million to the pension fund, CalPERS spokeswoman Amy Norris said. CalPERS has filed an objection to San Bernardino’s bankruptcy, suggesting it was simply a maneuver to avoid creditors and that the city had not developed a plan to pay its expenses in the future: “It appears that the City is financing its post-petition operating deficit by incurring post-petition obligations and simply not paying its post-petition bills,” accusing the city of “digging a hole that gets deeper every day.” But San Bernardino responds that deferring pension fund payments was necessary to allow the city to pay employees and “keep providing the most basic and critical services to the community.”

Compton, which has not filed for bankruptcy but has struggled with a $40-million deficit and a lack of cash to pay bills, also fell behind on its CalPERS payments, prompting the agency to file a lawsuit against the city in September. At that time, the city owed about $2 million, which later grew to $2.7 million, but it has since paid down all but about $600,000. Compton City Manager Harold Duffey said the city will be able to bring its payments up to date in December, when it expects to receive about $5 million from a parcel tax designated to pay pension costs. The city is also hoping to secure a $10-million line of credit this month.