I had been meaning to write about this one for a while and was going to leave it for a bit of slower news week, but since the topic came up earlier this week, it’s pretty timely.
Added to the list of cities filing for bankruptcy is the town of Mammoth Lakes, unlike all the others though, Mammoth Lakes got to bankruptcy via a massive legal judgment against it. From the LA Times:
The High Sierra town of Mammoth Lakes said Monday that it filed for bankruptcy because it cannot afford to pay a $43-million breach-of-contract judgment in a lawsuit brought against it by a developer.
In a prepared statement, Mammoth Lakes officials said “bankruptcy, unfortunately, is the only option left” for the town, whose largest creditor, Mammoth Lakes Land Acquisition, had won a state court order requiring full payment by June 30, 2012.
Facing a judgment nearly three times the size of its annual operating budget and a $2.8-million shortfall in its 2011-12 fiscal year, the town had already cut many services and asked employees to take reductions in pay.
Of course the creditor is disputing that Mammoth Lakes should be eligible for bankruptcy:
A new state law requires financially troubled municipalities to attempt mediation with their creditors before they may file for bankruptcy.
Lawyer Dan Brockett said the town invited Mammoth Lakes Land Acquisition to enter into mediation only to follow the law until it could move forward with a bankruptcy filing.
“The mediation in our view was something they would do to check a box,” Brockett told Reuters, adding that his client will contest the town’s eligibility for bankruptcy.
“We’re going to fight this,” Brockett said. “This whole idea we forced them into bankruptcy is nonsense.”
Brockett said the town snubbed a plan by his client that would allow it to pay off the judgment over 30 years.
“We structured a very reasonable proposal to resolve this,” Brockett said. “They’re not even insolvent.”
Why is this all important for Alameda, well because we still have a bit of a lawsuit pending of our own from a developer alleging breach of contract as well.
And Mammoth Lakes is not the first municipality to consider bankruptcy after a huge legal judgment. Remember Half Moon Bay? They also kicked around the idea of filing for bankruptcy protection after $18 million settlement.
Then there was the case of Desert Hot Springs, which actually did end up filing for bankruptcy:
Desert Hot Springs’ tale of woe begins in 1990, when a quartet of developers banded together to form the Silver Sage Partnership, Ltd. Their plan was to purchase land and develop a mobile home park in Desert Hot Springs…
The group planned to borrow money from a savings and loan and build homes working people could afford, but the city council had other ideas. The city declined to sign off on a federal funding mechanism, effectively quashing rights to build on the land. The Silver Sage Partnership countered by filing a federal lawsuit, claiming the city had violated the Fair Housing Act by denying the low-income housing.
Faced with a $3.1 million judgment and ever-mounting attorneys fees and interest, the city became the first California municipality in 25 years to file for Chapter 9 bankruptcy protection under the Federal Bankruptcy Code. They city sold municipal bonds to cover the debt and began a protracted effort to pay off a debt that had ballooned more than $10 million.
“Our city wasn’t well served by a previous City Council,” [Councilmember Russell] Betts said. “It’s easy to Monday morning quarterback, but people dug in their heels and wanted to be right. Well, right can take you to the poor house.” Betts said the city could have settled for about $2 million initially but that the figure grew closer to $20 million by the time legal fees and interest were calculated at the 2001 bankruptcy filing.
So while a lot of cities these days are considering bankruptcy protection because of labor costs and I think that some Alamedans think that — barring any change — it will be labor costs that lead Alameda to bankruptcy’s door, it shouldn’t be forgotten, particularly in light of the recent Mammoth Lakes example and the example of Desert Hot Springs, that a huge legal judgment and the ensuing appeals can also be disastrous for a city.
As to the cases of Vallejo, Stockton and San Bernardino style bankruptcies, in a larger article about the municipal bankruptcies, Chris McKenzie, executive director of the League of California Cities noted that there were three characteristics that Stockton and San Bernardino share that led up to their bankruptcy filings:
Those include cities with tax revenue severely affected by the mortgage crisis, cities that are older and have a significant amount of deferred maintenance, and cities that are unable to persuade public employee unions to agree to deep cuts in salaries and benefits.