Political Whispers

The City of San Bernardino is in a real bind regarding its bankruptcy proceedings. San Bernardino has a drop dead date to submit its bankruptcy plan by May 30. Management Partners, the organization brought on board to put that plan together has stated that due to staff failures they are likely to miss Judge Jury’s hard deadline, which will require a request to continue the proceedings, again. Reminder: The city filed for Chapter 9 bankruptcy in August, 2012.

There is a very real danger that Judge Jury may not grant an extension. If this occurs, and the bankruptcy is thrown out, bond holders who are currently being left to hold the financial bag are likely to go back into court and secure default judgments against the city for failure to pay their obligations. Bond holders certainly have nothing to lose by doing so as the current bankruptcy proposal throws them under the bus in favor of the California Public Retirement System (CALPERs) which is paid back in full.

But what does a bankrupt city have to offer as far as assets to seize? Former redevelopment assets are not part of the city budget and are not part of the equation. Those assets have to be liquidated through other means with the bulk of the money going back to the state. These assets total nearly $500 million dollars according to the State Treasurer’s Office.

Nearly every other asset in the city is fully encumbered. San Bernardino City Hall is now worth less than what is owed on the current notes. The city refinanced the building in the 1990’s taking cash out of the loan for some purpose and requires an earthquake retrofit of nearly $20 million that no one knows how to pay for. (The architecture design for City Hall was banned in California after the 1972 Santa Ana Earthquake.)

Two assets the city does own, which are not heavily encumbered are the City’s Trash Department and the City’s Water Department. Both of these assets could be worth in excess of $200 million when you include perpetual water rights and potential operating profits. Nothing would prevent bondholders from obtaining compensation for their losses from being granted some form of ownership of these public assets.

Private operations of trash service is common in contract cities. Estimates run the value of the city trash fleet at $25 to $35 million dollars. Operation of the service could be exceptionally profitable once the service was handed over to private operators away from the control of city hall. Privatizing the trash service has been brought up numerous times before by prior councils and rejected each time.

But the biggest jewel, would of course be some share or all of the city’s water rights and water department. San Bernardino owns most of the water rights in the basin that sits below the city which is her residents primary source of water. A portion is also legally adjudicated for the City of Riverside. The value of providing service to a captured customer base could be astronomical, and could be made legal collateral for unsecured debt. There is also ample local and national examples of successful water operations being provided to municipalities from private water utilities.

Of course, the city would not want to lose control of these assets. It’s a matter of power and pride though, more than efficiency. So far, these options have not been openly discussed, but they will be if the bankruptcy proceedings are discharged at the end of May.

City leaders would be wise to develop a legitimate bankruptcy plan by May 30th. Otherwise, they can count on a hostile takeover attempt of what few functioning assets the city still has.