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Third California city goes bankrupt

Published time: August 02, 2012 17:54
Edited time: August 02, 2012 21:54
Offices are seen at the San Bernardino City Hall building in San Bernardino, California (AFP Photo / Frederic J. Brown)

Offices are seen at the San Bernardino City Hall building in San Bernardino, California (AFP Photo / Frederic J. Brown)

With more than $1 billion in debt, California’s San Bernardino filed for bankruptcy on Wednesday. The city, which is the third in the state to go bankrupt in five weeks, blames its economic catastrophe on the 2007 housing crash.

The bankruptcy filing states that the city has between 10,001 and 25,000 creditors and owes “more than $1 billion.”  It disclosed a 30 percent shortfall in the city’s budget – $46 million.

San Bernardino is California’s third city to file for bankruptcy protection in the past two months, following Stockton and Mammoth Lakes.

The filings come at a time when California cities are struggling with rising pension costs and growing unemployment. San Bernardino currently has $195 in unfunded pension obligations, $61 million in unfunded retiree healthcare and $40 million of workers compensation.

“Just by looking around you can see that the city is going down,” small business owner Marcus Nelson told the Associated Press. “On this block there’s only three business – [mine] and two other pawn shops.”

In the mid-2000’s, San Bernardino took out $190 million in bonds and loans to pay for projects, including a new arena, new parking garages and a new city hall.

But budget problems hit hard in 2007. The city of about 210,000 residents suffered from the collapse of the housing market, and had the second highest foreclosure rate in the US.

“We lost in the course of a single year 16 million dollars in sales taxes. 60 percent of our property values were lost. When you understand that a city is largely financed by sales and property taxes – when you lose your economic base in that kind of a free fall – you’re in trouble,” the city’s mayor, Patrick Morris, told AP.

But the extent of the city’s debt was largely unknown until recently. A recent report by a city attorney claimed officials had falsified budget reports to the mayor and council for the past 13 years, in an attempt to cover up the scale of the city’s liabilities.

San Bernardino may not be the last California city to go bankrupt. Bankruptcy filings are usually a rare occurrence, with only 640 having been made since the Great Depression.

But other cities in the state are also in deep fiscal trouble. In July, the mayor of Compton, a small city outside of Los Angeles, asked state auditors to investigate unspecified “waste, fraud and abuse of public monies.” Financial officials predict it could file for bankruptcy within the next month.

Auditors are also worried that Victorville, California could go down the same route.

And in San Bernardino, a city where 75 percent of its budget goes to public safety agencies, the bankruptcy will lead to widespread layoffs or cuts in employee compensation, affecting the police and fire departments.

While unemployment is on the rise, San Bernardino is struggling to rebuild itself as it joins a trend of California cities declaring bankruptcy.