Balancing the books

The City of Gardena has hired a firm specializing in bankruptcy law to figure out how best to deal with a $26 million debt coming due in two months. The problem? No assets to repay the loan. But that’s a detail…

With a $26 million bill coming due in less than two months, the city of Gardena has hired a team of bankruptcy lawyers to prepare a financial strategy.

The New York-based international firm (Skadden, Arps, Slate, Meagher and Flom) is often cited as one of the largest in the world, and lists among its dozens of specialities banking and investing. It has represented such clients as Fannie Mae, State Farm Mutual Automobile Insurance Company and Verizon Communications.

The debt is the result of bad investments beginning a decade ago.

Gardena launched California’s first city-owned insurance company, Municipal Mutual Insurance, in 1993. The city floated $14.9 million in bonds, and gave Municipal Mutual $10 million in exchange for an agreement saying it would be repaid out of future profits. Those profits never came. The city refinanced the bonds in 1995, nearly doubling the amount owed. The company stopped issuing policies last year.

Also in 1993, the city started its own first-time home buyers program. After opening a $2 million line of credit, Gardena floated bonds when people stopped repaying their loans. In total, the city gave 73 loans, of which 33 defaulted, before the program ended in 1997. The original debt was refinanced and ballooned to $6.5 million.

The city, after paying down the principal to $26 million, is now only making interest payments on the bonds, about $1 million a year.

“It’s time the community knows what shape the city is in and what we are looking at in trying to get rid of a debt this council did not create,” Medrano said. “A lot of times we tend to not make the people aware of what’s going on to stop mass hysteria. But sometimes we need to let them know what shape we are in.”

The city might have to default on a loan, Tanaka said, but that wouldn’t necessarily lead to bankruptcy because the city has no assets to seize.

“We owe $26 million and we don’t have the assets to pay it,” Tanaka said. “We are on a crash course here.”

From the Daily Breeze.

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