San Bernardino Becomes Third California Municipality To Declare Bankruptcy

Thursday, July 12, 2012 09:45
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San Bernardino Becomes Third California Municipality To Declare Bankruptcy

Tags: bonds | economy | healthcare | pensions

A third city in the state of California—the largest municipality in the largest county of the 48 continental United States—has decided to declare bankruptcy. San Bernardino cannot pay its employees. This means employees will likely leave to find work elsewhere. City services including fire, police, and cleanup will be severely compromised.

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The city had already been dealing with tax revenue problems, increasing costs, rising unemployment, and accounting discrepancies. Taxable bonds issued by the city saw yields as high as 11% in trading on Thursday, July 12, 2012.
 
Pension and debt service costs combined with declining revenues have thrown the city into an insolvent situation. California governor Jerry Brown issued a mandate this year that requires municipalities to go into mediation or seek emergency help before declaring bankruptcy.
 
The housing crisis that caused home values to plummet began the cycle of issues that are throwing large municipalities into Chapter 9 reorganization. Some municipalities have felt economic pressure all the way back to the 1990s.
 
Retiree health care costs are rising and pension obligations are not being met. All factors considered, municipalities under such pressure seem to have few other options than to seek bankruptcy protection.
 

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