San Bernardino Files for Bankruptcy with Over $1 Billion in Debt

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On Wednesday, San Bernardino became the third California city to seek protection from creditors citing over $1 billion in debts. The city had already declared last month that it was experiencing a fiscal crisis and projected spending would exceed revenue by $45 million in the fiscal year beginning July 1.

A recent report by the city attorney in San Bernardino had claimed that city officials had falsified budget reports to the mayor and council for 13 out of the last 16 years, thus hiding the scale of debt the city had. Also last month, the San Bernardino County Sheriff’s office had confirmed to the media that an investigation was on “related to allegations of possible criminal activity within departments of the San Bernardino city government.”

However, city council members had summarily rejected such allegations, and now chosen to file for bankruptcy. The filing was made in the United States Bankruptcy Court, Central California District stating that the city had between ten thousand and twenty five thousand creditors and “more than $1 billion” in liabilities. The court papers also mentioned that the city, currently, has assets worth more than $1 billion.

  

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On July 24, San Bernardino’s city council adopted an emergency three-month fiscal plan to suspend debt payments, freeze vacant jobs and stop payments destined for a retiree health fund, giving city staff the time to create a detailed bankruptcy plan. A city spokesperson said “The bankruptcy filing was just to get the protection in place, to kick the process off.”

Also in late July, San Bernardino reported that it has liabilities of $195 million in unfunded pension obligations, $61 million in unfunded retiree healthcare, $40 million in workers compensation, and payments for a $50 million pension bond. The city calculated its immediate indebtedness payable from its general fund to be about $56 million.

Within the last two months, the cities of Stockton and Mammoth Lakes have also filed for Chapter 9 bankruptcy. Stockton is the largest U.S. city to have filed for bankruptcy as a result of suffering from the housing crash. While cities do have the provision to file for bankruptcy since 1937, so far, only about 640 such filings have been made in the course of the last 75 years.

Stakeholders are closely watching the recent bankruptcy filings by the cities, as they would show whether cities in fiscal trouble could renege on bond debts and pension obligations. The decisions would affect the fate of the more than $3 trillion municipal bonds market in the country.