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Thursday, August 02, 2012 12:24 AM

San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun

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Fearing action by creditors, San Bernardino, California, Files Chapter 9 Bankruptcy Petition

San Bernardino, California, after disclosing a $46 million shortfall in the city’s budget, filed for municipal bankruptcy.

San Bernardino listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California. It’s the third California city to seek court protection from creditors since June 28.

City officials sped up the timing of the filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday 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.

One of the main problems is the high cost of the city’s union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview.

Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have much more money to spend, Shorett said.

“We are set up for failure,” he said.

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.
Major Wave of Municipal Bankruptcies Has Begun

A major wave of municipal bankruptcy filings is now underway. Scores of other cities nationwide will eventually do the only thing that makes sense: file for bankruptcy to escape pension promises and union salaries that cannot possibly be met.

In California, Oakland and Los Angeles are among the walking dead.

Unions would be wise to negotiate with cities in advance of bankruptcy filings to protect the most benefits for the most workers. However, the odds of that happening are close to zero.

Mike "Mish" Shedlock
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