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California Bankruptcies Spur Concerns for OK and Rest of U.S.

As San Bernardino becomes the third California city in two weeks to file bankruptcy, the implications for cities in Oklahoma and across the country that continue to struggle with weak property and sales tax revenues in the face of increasing pension costs have not been overlooked. Since Chapter 9 was added to the bankruptcy code by Congress in 1937, to allow municipalities to seek bankruptcy protection, approximately 640 government entities have filed. Among them is Stockton, a large California city whose financial problems stem at least in part from a spending spree the city undertook during the housing boom, which left the municipality unprepared for the economic crisis that then plagued the country in 2008. Stockton is projecting a $26 million budget shortfall this fiscal year, with annual deficits of $47 million projecting within three years. Unfortunately, this trend isn’t unique to these cities, or even to the state of California. As Calif. Governor Jerry Brown said on Wednesday, “Cities [across the country] may not have the money they need, and they have to take whatever reasonable steps they can under the law.”

Stockton, California Makes History With Bankruptcy Filing

Stockton, Calif.’s bankruptcy proceedings, which began last week, marked a significant historical event, as Stockton is the largest city in U.S. history to ever file for bankruptcy, with a population of nearly 300,000. San Bernardino, a city of 210,000 that flourished economically during the housing boom and has suffered considerably since the bust, could, in turn, become the second largest U.S. city to file for bankruptcy. The smaller Mammoth Lakes opted for bankruptcy on July 3. Before Stockton, no California city had filed for bankruptcy since Vallejo in 2008.

Budget Shortfalls and Annual Deficits

According to state officials, San Bernardino’s financial difficulties stem from poor property and sales tax revenues in combination with rising pension obligations and a loss of state redevelopment funds. Despite cutting the workforce by 20% over the last four years and negotiating $10 million in annual concessions from employees in each of the past three years, the city is facing a budget shortfall of $45 million and annual deficits over the next five years. According to City Attorney James Penman, budget officials for San Bernardino had presented falsified budget documents to the City Council for 13 of the last 16 years, covering up the city’s deficit and reporting a surplus. Penman reports that the city is likely to declare a financial emergency on Monday, although it’s not clear when the formal bankruptcy filing will occur.

Municipalities Filing Bankruptcy a New Trend?

“People are waiting to see whether these are the exceptions to the rule or whether we have a new trend,” said Jim Spiotto, a Chicago attorney who follows municipal bankruptcies. “I do think it may be something of a wake-up call.” In some cities, like Harrisburg, Pennsylvania and Mammoth Lakes, California, officials have considered bankruptcy as a means of coping with a specific debt. Cities like Stockton, California and Central Falls, Rhode Island, however, have sought bankruptcy as a way to deal with a grim financial outlook due to rising costs and stagnant revenues. “Those are the ones you want to watch,” says San Francisco attorney Michael Sweet. “The cities that have a higher reliance on property tax revenue to support their general funds are the ones that are going to feel the most pain.”

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