With just $150,000 left in the city's bank account, San Bernardino declared a state of fiscal emergency and filed for Ch. 9 bankruptcy earlier this month. The Southern California city of 210,000 is the third city in the state to make that step in the last month, leading some analysts to predict a wave of other cash-strapped U.S. cities could follow suit.
San Bernardino and two Northern California cities - Stockton and Mammoth Lakes - listed different reasons for filing for bankruptcy, but all share the problem of low sales and property taxes. With the effects of the recession and housing bubble burst still lingering, those revenues continue to shrink. For example, San Bernardino had a 15.9 percent unemployment rate in May, and housing prices have dropped 68 percent since 2007.
The recent string of Ch. 9 filings in California has analysts concerned: "The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities -- in California and, perhaps, elsewhere -- will begin to view debt service as a discretionary budget item, and that defaults will increase," Anne Van Praagh of Moody's Investors Service said in a report released by the ratings company last week.
Bankruptcy protection forces creditors, public employee unions, and city officials to negotiate payments and restructure the city. Since 1937, 640 U.S. cities, counties, and agencies have taken this road. Last year, 13 government entities filed for bankruptcy protection - the highest annual level in nearly two decades.
City officials in Stockton - the largest U.S. city to file for bankruptcy - sought court protection from creditors as they faced a $26 million budget shortfall. Less than a month later, the Central Valley farming town east of San Francisco is already dealing with drastic cuts. The police department is down to 323 officers from 441 in 2008 even as the crime increases, according to police spokesperson Joseph Silva. "We've had to create a whole different policing strategy, relying more on social media, neighborhood watch groups, and security companies being hired by businesses who provide an extra set of eyes and ears in the community," he said.
In downtown Stockton, longtime business owner Jim Donaldson's automotive company has gone from 18 employees to just 7 in the past two years, while his friends who work for the city have lost their health benefits and pensions.
Still, the third generation owner of J.F. Donaldson Tire isn't giving up yet. "The fact of the matter is, our city government over-extended itself - the hole got too deep. That, coupled with the economy, has us in this predicament. We're all feeling the pain," Donaldson said. "Just like many homeowners and business owners, the city has to back up and start over."
In San Bernardino, which faces a budget deficit of $45 million over the next five years, not all the council members believed filing for Ch. 9 was the best idea. Councilman Chas Kelley fears it will hurt the city's economy in the long term.
"I think that we certainly should be exploring all options because bankruptcy is a stain on the city," said Kelley, one of the two members who voted against the filing. "It doesn't reflect well on residents, it doesn't reflect well on businesses, and it certainly doesn't reflect well on this municipal government."
And Kelley's concerns are legitimate. Four years after the city of Vallejo, Calif., filed for bankruptcy, the Bay Area city struggles to maintain basic services, with only 10 percent of its roads maintained and the number of policemen and firemen cut in half from before the bankruptcy.
"It takes an enormous toll on everyone,'' Vallejo Mayor Osby Davis told the Los Angeles Times. "And you have the stigma of being a bankrupt city. How do you come out of being labeled a bankrupt city to one that is a desirable place to live?"
Vallejo resident Molly Moody said she's learned to put up with potholed roads and avoid certain neighborhoods. Still, she and her husband Eric see an upside to the bankruptcy: They were able to buy a house for a fraction of the price they once paid in Sonoma County: "Everything is cheaper here."
Other residents are choosing to leave bankrupt cities. In San Bernardino, Debbie Choi, a medical student at nearby Loma Linda University, said she previously considered staying in San Bernardino to work at the local hospital or open her own practice. Now, she plans to move out once she finishes school.
"People aren't going to want to move here and people are not going to want to stay here," Choi said. "The worst possible thing that could come out of this is that the people would have to bear the brunt of [the neglect] of the top, mismanagement, or even corruption."