Bankrupt San Bernardino, Calif., warns it may contract out services, raise debt

Reuters News
Posted: Nov 06, 2014 6:53 PM

By Tim Reid

RIVERSIDE Calif. (Reuters) - Bankrupt San Bernadino, California, might have to contract out essential services and place a revenue bond on the ballot in 2015 elections after a measure failed this week that would have lowered base pay for police and firefighters, said a lawyer for the city on Thursday.

Paul Glassman, San Bernardino's bankruptcy attorney, told the federal judge overseeing the city's bankruptcy that a rejection by voters on Tuesday of a pay-cutting ballot measure for police and firefighters was a "gamechanger" that had thrown the restructuring plan off track.

Lawyers for San Bernardino's police and fire unions reacted with dismay and anger to what appeared an effort by the city to blame the failure of Tuesday's ballot measure on the city's inability to come close to producing a bankruptcy exit plan, 28 months after it entered Chapter 9 protection.

San Bernardino, a city of 210,000, 65 miles east of Los Angeles, declared bankruptcy in July 2012 with a $45 million budget deficit. Glassman told U.S. Federal Bankruptcy Judge Meredith Jury, after demands by police and firefighter unions for a deadline to produce a bankruptcy plan, that the city would now be unlikely to produce an exit blueprint before the summer of 2015.

"This is the scariest day in this case," said Corey Glave, the firefighter union's attorney. "They (the city) are saying because voters rejected the ballot measure, we have no plan. We are 28 months into this case. We need deadlines set."

Ron Oliner, representing the city's police union, noted that Detroit, a far bigger city that declared bankruptcy in July 2013 with $18 billion of debt, produced a bankruptcy plan within eight months. Stockton, California, which declared bankruptcy just before San Bernardino, was given the green light by a federal judge last week to exit Chapter 9 protection.

"Right now we are just spinning wheels," Oliner said.

San Bernardino is one of a handful of municipal bankruptcies being closely watched by the $3.7 trillion U.S. municipal bond market. Bondholders, public employees and other state and local governments are keen on understanding how financially distressed cities handle their debts to Wall Street, compared with other creditors such as pension funds, during Chapter 9 protection.

Glassman said the city not only faced the challenge of paying creditors, but also had a duty to provide essential services to its residents. One option now was to contract out essential services, he said. The city council has already raised the possibility of contracting out San Bernardino's fire service to the county or state.

Judge Jury set a Nov. 18 hearing for the sides to argue the merits of imposing a deadline on the city to produce a bankruptcy plan.

(Reporting by Tim Reid)