The nature of risk – San Bernardino, three other California municipalities are bankrupt

The California city of San Bernardino is seeking bankruptcy protection, the Los Angeles Times reported early Wednesday (July 11). Journalist Phil Willon, who has covered the town for some time, filed from the troubled city overnight. He wrote that Mayor Patrick Morris concedes the decision to seek bankruptcy protection amounts to a “stain” on the community. The only option, Morris said, was “draconian cuts” in local services, including the police and fire.

A finance officer told local officials the city faced an “immediate cash flow issue.” The council chose, on a 4-2 vote, to seek bankruptcy protection. A restrained Willon reported the filing “is certain to heighten concerns about the fiscal forecast for other struggling California cities, which have been slashing jobs and services as tax revenues have declined during the prolonged economic slump.”

City Atty. James Penman, Willon reported, said city budget officials “had falsified documents presented to the mayor and council for 13 of the last 16 years, masking the city’s deficit spending.” Penman did not name those responsible, but said, “For the last 16 years the budget prepared for the council showed the city was in the black. The mayor and the council were not given accurate documents.”

The full text of Willon’s stories, revised early on Wednesday, are available here

Economist Gary North, who operates a popular blog deemed “The Tea Party Economist” commented that the news from the city of 209,000 was “another domino” in what will ultimately be a cascade of municipal failures in California. He pointed to recent bankruptcy filings by Stockton, a city of 300,000, Vallejo, and the small town of Mammoth Lakes.

In a Wednesday morning posting, North observed, “San Bernardino had boomed with the housing bubble. The city spent money like there was no tomorrow. But tomorrow has arrived.

“These bankruptcies are showing politicians a convenient way to get rid of existing debt. They will stick it to pensioners. This process has only just begun. Municipal bond investors will soon learn about the nature of risk..”