Atwater, California: A Fourth Calif. City on the Verge of Bankruptcy

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Oct 1, 2012

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The Central Valley town of 28,000, Atwater, California will be the fourth municipal bankruptcy filed in the state this year. Stockton, San Bernardino and Mammoth Lakes have all filed Chapter 9 bankruptcies to restructure bond debt, address issues paying pensions, and recover from legal judgments, among other respective financial woes. Atwater city council members will vote October 3rd to solidify the move forward with a “fiscal emergency,” which will lead to bankruptcy.

Atwater has a reported $95 million in debt from bondholders, and unemployment in the town is more than 10% higher than the national average. But unlike the previous three California bankruptcies, Atwater’s financial degradation is primarily based on unfunded redevelopment projects.

During a time when real estate was booming in the Golden State, cities like Atwater grew roots in redevelopment, and neglected other areas of long-term fiscal bedrock. Atwater then took a hit when the state stopped funding redevelopment projects to its cities. This left many California municipalities without a strong financial net after the real estate “bubble” burst and property taxes sank, Atwater included.

What Is a California “Fiscal Emergency”?

In California, before filing for Chapter 9 municipal bankruptcy, cities are required to make attempts to resolve their fiscal problems through collaboration with creditors, employee groups, and other interested parties. A neutral evaluator reviews these efforts and the town’s ongoing fiscal condition. If the evaluation does not conclude that a feasible resolution has been drafted, the city can then proceed with their Chapter 9 bankruptcy filing.

Under California bankruptcy law, however, a local government in urgent need of restructuring, such as in the case of Atwater, can bypass the evaluation process and vote to self-declare fiscal emergency, and then immediately file bankruptcy.

Declaring a fiscal emergency is the penultimate step for an eventual bankruptcy in California. In other words, if Atwater officials decide in October that they will declare a fiscal emergency, one could conclude with confidence that the next step is bankruptcy.

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