Southern California City Weighs Fiscal Emergency To Avoid Bankruptcy
Sunday, November 17, 2013
A Southern California city that declared bankruptcy more than a decade ago is trying to avoid repeating history.
The city of Desert Hot Springs, a modest bedroom community known for a number of boutique hotels and spas, will consider declaring a fiscal emergency Tuesday in a bid by municipal officials to drive contractors and labor to the bargaining table and stave off the specter of Chapter 9.
After spending too much for several years and drawing down reserves, the city now only has enough cash to pay its bills until March, said Bob Adams, interim city manager.
"We're going to have to start taking some corrective actions," Adams said. "Certainly, we want to avoid bankruptcy."
The discussion comes as scores of cities across California grapple with the aftermath of the economic downturn, rising pension costs and the elimination of redevelopment funds due to state government budget woes. Three California cities —Stockton, Mammoth Lakes and San Bernardino — sought federal bankruptcy protection last year.
Of roughly 650 federal bankruptcy filings, there are only about six instances where the same city has filed twice, said Jim Spiotto, a Chicago attorney who tracks municipal bankruptcies. Several cases involved tiny municipalities that suffered severe population declines, eroding the tax base, he said.
That isn't the case in Desert Hot Springs, which has grown since sun-seeking retirees helped incorporate the city of 1,000 people in 1963. The city's population grew quickly in the 1980s and is now about 27,000.
The city near Palm Springs declared bankruptcy in 2001 after facing a $9 million legal judgment and emerged from protection in 2004.
Today, Desert Hot Springs is expecting revenues in the current fiscal year of $14 million, but it projects $20 million in spending and reserves don't make up the gap, according to a city staff report.
The biggest costs stem from labor, with 70 percent of the budget devoted to public safety, Adams said. But there's room for other cuts to be made, he said, noting some contractors have already offered to take a hit.
Declaring an emergency would give the city "a little more clout" in talking with creditors, labor and contractors, he said.
Councilman Russell Betts said he'll back the emergency in part to stave off bankruptcy. He said, however, it's key to find other ways to save, for example, by slashing a senior center's costs by relying more on volunteers.
"I don't think we're going to actually go through the formal declaration of bankruptcy," Betts said. "A company that finds itself in a reorganization situation, it can go to its creditors and work out a reorganization without going through the formal process of filing."
He added, "If everyone goes along with it fine, they can work it out."
The meeting Tuesday comes just weeks before a newly elected city council takes office. A change in the makeup of elected officials could influence what path the city takes and how labor groups respond in future negotiations, said Michael Sweet, a bankruptcy attorney with Fox Rothschild's San Francisco office.
He said, "Whether they file for bankruptcy will have a lot to do with the economics, and also something to do with the politics."