San Bernardino City Council declares fiscal emergency, votes to file bankruptcy

The City Council of San Bernardino, California, declared a fiscal emergency ahead of a planned bankruptcy filing, a move that allows officials to bypass a 60-day mediation period with creditors that is mandated by the state.

The seven-member council immediately followed the action Wednesday night by voting 5-2 to seek Chapter 9 bankruptcy protection.

“These votes mean that the City of San Bernardino will move forward with its plan to file for Chapter 9 bankruptcy protection in approximately 30 days,” according to a statement released by Andrea Travis Miller, the interim city manager.

“It does not mean the city will not negotiate in good faith with its creditors – just that it may not complete those negotiations prior to the Chapter 9 filing.”

Last week, Miller and Finance Director Jason Simpson issued a report stating that the city was facing insolvency and its expenditures are projected to exceed revenues by $45 million. The city’s general fund reserves had been as high as $19 million in 2001 but are now depleted, the report said.

Some $10 million to $16 million in annual revenue has evaporated in recent years as taxable sales dried up and property values plummeted in the city of 211,000 residents, the report said. San Bernardino is about 60 miles east of downtown Los Angeles.

Prior agreements reducing city salaries are now ending, “creating an increase in salaries and benefits of $10 million effective July 1, 2012, and increased costs in future years as merit increases resume,” the report said.

Despite negotiating tens of millions of dollars in concessions and reducing its work force by 20% over the past four years, San Bernardino would not have enough cash on hand to meet its obligations, according to the report.

“The city has reached a breaking point,” the report said.

San Bernardino continues to date to meet its financial obligations to vendors, creditors and employees, Miller said.

San Bernardino would be the third California city to file for bankruptcy in the past few weeks. Many municipalities in the Golden State and around the nation are struggling to cover their costs as the economic malaise continues to hurt tax revenue streams, experts said. This will lead to more municipal bankruptcies, which have been rare until now.

“This is not the end. This is the beginning,” Peter Navarro, business professor at University of California, Irvine, told CNN recently. “As cities see it can be done and is being done, it will give them the idea to do it.”

The town of Mammoth Lakes, California, sought protection July 2 after a property developer won a $43 million court judgment against the resort town of just over 8,000 residents. Experts say this filing should not be lumped in with the other two California towns since it was an unusual circumstance.

The city of Stockton, however, filed for bankruptcy in late June after three months of mediation with creditors failed to close a $26 million budget shortfall. The city of 292,000 residents had already addressed $90 million in deficits over the past three years, mainly through reducing services and employee compensation.

Both Stockton’s and San Bernardino’s fiscal troubles are due in large part to the massive housing downturn and recession that swept across California. Both towns were hit particularly hard by the foreclosure crisis, which left numerous abandoned homes and reduced property values in its wake. That led to lower property tax revenues, critical to supporting public services.

Also, municipalities have struggled from budget changes made on the state level. Because of massive budget shortfalls, Gov. Jerry Brown and the state legislature made changes to vehicle tax money and redevelopment agencies that stripped locales of hundreds of millions in state funding.

While some areas of the Golden State are starting to recover, the regions containing those two towns are not, said Chris McKenna, executive director of the League of California Cities.

By filing for bankruptcy, cities will be able to keep police and firefighters on the street and possibly keep some parks and libraries open while they work out their finances, he said.

More municipal bankruptcies are likely in California and throughout the nation, as cities continue to battle rising costs and a weak economy, said Eric Hoffman, an analyst at Moody’s Investors Service.

CNNMoney’s Tami Luhby contributed to this report.