Friday, July 13, 2012

Authorities probe bankruptcy-bound San Bernardino, Calif.

The Sheriff's Department said Thursday it was working with police and the district attorney's office to investigate possible criminal activity within the government of San Bernardino, where city officials voted this week to take the rare step of filing for bankruptcy.

Sheriff-Coroner Rod Hoops said in a statement the investigation began at the request of city officials several months ago.

City Attorney James Penman said earlier this week that the City Council had been presented with falsified documents that masked the city's deficit for 13 of the past 16 years, and he had given evidence of financial mismanagement to "appropriate government agencies," declining to provide further details.

"Several months ago at the request of San Bernardino City officials, the San Bernardino County Sheriff's Department, along with the San Bernardino Police Department and the district attorney's office began an investigation related to allegations of possible criminal activity within departments of the San Bernardino city government," the sheriff's department said in a statement on Thursday.

"The investigation is continuing and details will not be released at this time," the statement said. "Updates will be provided as new information becomes available."

A city spokeswoman could not be reached for comment on the investigation.
The sheriff declined to release any details about the investigation, who it's focused on, or whether it relates to the bankruptcy or falsified documents.
Mayor Pat Morris told the Riverside Press-Enterprise Thursday night that he was frustrated by the sheriff's disclosure.

"I wonder why they would do that, if it's an ongoing investigation," Morris told the newspaper. "I was a prosecutor, for God sakes. I was a judge, and you don't put out press releases announcing an investigation."

Morris said he was aware of the broad outlines of an investigation but said it was "in no way related to what Penman talked about this week at all, not at all."

Interim City Manager Andrea Travis-Miller, who was instrumental in discovering the degree of the city's financial problems when she and a new finance director took a close look at reports, said she had not discovered any deliberate deception.

"I have not found that there's anything more than negligence, maybe sloppiness," she told the Los Angeles Times on Thursday.

'It's no one's fault'

She said the city would have faced the crisis with or without the reporting problems.

"Really, it's no one's fault, and yet it's everyone's fault," Travis-Miller said.
San Bernardino marks the third time in recent weeks that a city in the most populous U.S. state has opted to seek protection from its creditors.

The investigation will add to the municipal debt market's confusion about San Bernardino's unexpected vote to proceed toward Chapter 9 bankruptcy, said Dick Larkin, director of credit analysis at municipal bond broker-dealer HJ Sims: "It raises more questions than it answers."

Larkin noted municipal debt analysts believed San Bernardino had a handle on its financial problems until Tuesday. Now they're trying to piece together how the city's finances fell apart so abruptly, Larkin said.

The city council's vote followed a report by city staff that said the city exhausted its reserves and projected spending would exceed revenue by $45 million in the current fiscal year, which started on July 1.

"There's something strange about the whole situation," Larkin said. "Something just doesn't hang right."

The council will consider next week whether the city, which has a population of about 210,000 and sits about 65 miles east of Los Angeles, will enter into mediation with its creditors or file directly for bankruptcy protection.

A California law requires financially distressed municipalities to open talks with creditors as a way to avert a Chapter 9 bankruptcy filing, but negotiations may be skipped by declaring a fiscal emergency. 

On Monday, the city council will receive an opinion from its legal staff on whether San Bernardino needs to enter into pre-bankruptcy mediation with its creditors, according to a statement from the city's spokeswoman.

City staff members are also preparing a plan to balance San Bernardino's budget that would be presented to a bankruptcy judge in the event of a Chapter 9 filing within the next 30 days, the statement said.

"While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline and that has brought us to a critical point," interim City Manager Andrea Travis-Miller said in the statement.

She also said that a Chapter 9 filing would allow San Bernardino to provide essential services and restructure its finances.

San Bernardino could join the California communities of Stockton and Mammoth Lakes in bankruptcy court.

Stockton, a city of nearly 300,000 in the state's Central Valley, last month became the most populous U.S. city to file for bankruptcy. It failed after three months of talks with its creditors to obtain concessions to close its $26 million budget gap.
Mammoth Lakes, a ski resort town of about 8,000 residents, filed for bankruptcy last week due to a nearly $43 million legal judgment against it.
The Associated Press and Reuters contributed to this report.

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