San Bernardino became the third California city in recent weeks to seek bankruptcy protection from its creditors and, like Stockton before it, was immediately threatened with retaliation from the bond markets.

“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,” said Dick Larkin, director of credit analysis at muni bond broker-dealer HJ Sims. “If there are more coming, there will be big penalties to (municipal debt) issuers in California, all the way up the state level.”

The Southern California city of 209,000 faces a $45.8-million budget shortfall in the next fiscal year and has stopped paying some vendors, some of whom have filed liens against it. An analysis of the budget, released days ago, projected “deficits of major proportions” in all five years of its forecast and stated, “The City’s reserves and discretionary funds have been depleted, and the City faces insolvency.”

The fiscal situation remains even after the city negotiated $10 million in concessions from employees and cut the workforce by 20% over the last four years. City officials blamed the nation's economic retrenchment, escalating pension costs, lucrative labor agreements and the state’s raid on redevelopment funds for its plight.

But City Attorney James Penman had another explanation. Penman alleged that city budget officials had masked the city’s deficit spending by falsifying documents presented to the mayor and council for 13 of the last 16 years. Mayor Patrick Morris said that was the first time he had heard that allegation.

Four San Bernardino council members voted for the bankruptcy authorization, two opposed it, and one abstained.

After Stockton filed for bankruptcy June 28, municipal bond insurer Assurance Guaranty, which insures three Stockton bonds worth $161 million, wrote on its website that the city should have demanded austerity in the form of “labor and retiree concessions,” pension reform, “curtailment of non-essential City services” and the sale of city property before filing for bankruptcy,  implying a possible challenge to the move.

Muni markets were further roiled when Mammoth Lakes voted to declare Chapter 9 on July 3.

But San Bernardino City Manager Andrea Miller said that even if the council eliminated all services except for the police department, it would still be mired in debt.

–Ken Broder

To Learn More:

San Bernardino, California, Weighs Chapter 9 Bankruptcy (by Michael B. Marois and Alison Vekshin, Bloomberg)

San Bernardino Seeks Bankruptcy Protection (by Phil Willon, Los Angeles Times)

Budgetary Analysis and Recommendations for Budget Stabilization (City of San Bernardino) (pdf)

San Bernardino Becomes Third California City Seeking Bankruptcy (by Jim Christie, Reuters)

Instead of Going Bankrupt, Insurer Says, Stockton Should be Going after Labor and Retirees (by Ken Broder, AllGov)