By Peter Henderson and Tim Reid
SAN BERNARDINO, California (Reuters) - San Bernardino, the third California city planning to file for bankruptcy since June, voted to stop debt payments, freeze vacant jobs and quit paying into a retiree health fund under a three-month emergency proposal submitted to the city council on Tuesday.
The city is preparing a longer-term plan to make it through its expected bankruptcy period, when it will financially regroup under court protection from a financial hole created by a combination of the bad economy and poor management.
San Bernardino's drastic step, passed after a unanimous vote by the seven-member city council, comes as several cities in California prepare for bankruptcy or are in such dire financial straits that bankruptcy protection looks increasingly likely.
The city is also in the middle of accounting probes and expects more, Interim City Manager Andrea Travis-Miller and Director of Finance Jason Simpson said with little elaboration in a memo outlining the plan.
Later, at a packed and sometimes heated meeting in San Bernardino's city hall, Travis-Miller said a second, mid-term plan will be presented to the council within 30 days to cover the city until a court approves a full bankruptcy plan.
During a series of comments by members of the public, several became emotional, while one demanded the resignation of the city mayor, Patrick J. Morris, who has been in office for six years.
Steve Rouchleau, a city employee for 20 years who was born and raised in San Bernardino, fought back tears when talking about the city's pending bankruptcy.
"Please play your cards carefully because our lives are in your hands," he told the council.
A recent report by the city attorney said city officials had falsified budget reports to the mayor and council for 13 of the last 16 years, hiding the scale of the city's debt.
OTHER CALIFORNIA CITIES IN TROUBLE
San Bernardino follows a trail blazed by Stockton, California, which is seeking bankruptcy protection.
On July 17, the mayor of Compton, a city outside Los Angles, said he had asked state auditors to look into unspecified "waste, fraud and abuse of public monies." That city could file for bankruptcy by September 1, its financial officials said.
In Victorville, in southern California, auditors in January said there "was substantial doubt about the city's ability to continue as going concern."
Prepared for San Bernardino council's Tuesday meeting, the emergency plan recommends deferring $3.6 million in debt and lease payments, including on pension bonds and infrastructure bank loans.
The city council would also consider other emergency measures, such as a freeze of non-essential vacant positions, spending cuts organization-wide, suspending all equipment purchases and deferring any new capital improvement projects. (PDF of proposal: http://r.reuters.com/qez59s)
The city of about 210,000 people located 65 miles east of Los Angeles, had avoided wider scrutiny of its financial problems until the city suddenly began preparing for insolvency earlier this month.
In the past few weeks, it has declared a fiscal emergency and begun preparing for a bankruptcy filing, revealing a $45.8 million shortfall for the budget year that began this month.
BOND MARKET UNFAZED
The timing of the proposal to suspend debt payments surprised some traders on the $3.7 trillion municipal bond market.
"Frankly in the past, bondholders were not subjected to losses," said Kurt van Kuller, managing director at the Division for the Americas of Bank of Tokyo-Mitsubishi. "They maybe have more willingness to default at an earlier stage."
San Bernardino, like Stockton, would not stop payments to the California Public Employees' Retirement System, the state pension fund that runs some city funds as well.
On Tuesday, there were no major trades of tax-exempt San Bernardino bonds on the market. Tax-exempt California general obligation debt was well supported by both dealers and customers on Tuesday. The 10-year spread over triple-A bonds closed on Monday at 74 basis points, well below the yearly average of 81 basis points.
(Reporting by Tim Reid; Editing by Lisa Shumaker)