San Bernardino Bankrupt. Up Next: Scranton?

California Town Is 3rd To Go Bankrupt in Last 2 Weeks

ByABC News
July 11, 2012, 4:04 PM

July 11, 2012 -- The drumbeat of cities filing bankruptcy grows louder: San Bernardino has become the third California city in two weeks to go bust, after Stockton (the biggest U.S. city so far to file) and the small Sierra hamlet of Mammoth Lakes.

The L.A. Times reports that San Bernardino's filing is certain to heighten worries about the fiscal solvency of other California towns. But the next bankruptcy might not come from California: Scranton, Pa., is so cash-strapped that on Friday it made an unprecedented move and cut the pay of its municipal workers to $7.25 an hour--minimum wage.

While Scranton's crisis has been sudden, San Bernadino's has been years in the making: An analysis prepared by the city's finance department blames "accounting errors, deficit spending, lack of revenue growth and increases in pension and debt costs." The recession hit the city hard. San Diego County has the third-highest rate of foreclosures in the nation.

The "accounting errors" may not have been innocent.

According to San Bernardino's city attorney and as reported in the L.A. Times, budget officials for over a decade falsified financial reports, in an attempt to mask the city's problems. "The mayor and the council were not given accurate documents," the Times quotes the attorney as saying.

The city's deficit stands at $46 million, despite the fact that San Bernardino has cut its workforce 20 percent in the past four years.

A continent away, Scranton's workers say Mayor Chris Doherty's decision to cut their pay took them by surprise. The move affects some 400 employees, including police, fire fighters, and garbage collectors. Doherty, for his part, says the step was dictated by necessity. City business manager Ryan McGowan tells the Scranton Times-Tribune that the city has just $133,000 in cash but owes vendors $3.4 million.

Sam Vitris, a truck driver with the city's department of public works and the head of the DPW's union, tells the Wall St. Journal he saw his pay go from $19.39 an hour to $7.25, a drop of 62 percent.

John Judge, president of the fire fighters' union, told ABC News that his members feel violated. "How am I going to make my mortgage payments?" he asks. "How am I going to feed my family?" As a veteran fire fighter getting paid $7.25 an hour: "The kids at the ice cream stand down the street get $8.50."

He says he asked the guy who takes his trash away how his paycheck had been affected. The man told him it had dropped from $140 to $90. Says Judge, "You can't fill your tank with gas for $90."

Although in 2010 California's then-governor Arnold Schwarzenegger cut state workers' pay to the minimum wage for a single month, no city, before Scranton, has done the same.

Thomas Jennings, attorney for Scranton's biggest unions, says Mayor Doherty is violating the city's contractual obligations. "There's not a law around he hasn't violated." Jennings has brought suit to stop Doherty from issuing any more cut-rate checks.

Calls to Doherty's office by ABC News requesting comment went unreturned.

Some, including Jennings, claim the city's problem is less financial than political. "This isn't California," says Jennings. "Scranton isn't Stockton. The money's there, if the city can just get its political act together."

He attributes Scranton's crisis to a temporary impasse between the mayor and the city council, who hold different views about how to right the city's finances. Scranton's lenders are refusing to bail the city out until the council and the mayor have agreed upon a plan.

Though Jennings thinks bankruptcy is not likely, city council president Janet Evans told the local Daily Review & Sunday Review that while Scranton ought to do everything possible to avoid filing, bankruptcy "remains on the table" as "a last resort." City solicitor Paul Kelly told CNN that bankruptcy is "something we're discussing." He called it "a viable possibility."