HispanicBusiness

The recent bankruptcy filings of three California cities have U.S. investors worried that Fresno could be next to go down this road, according to a major Wall Street financial house.

Vikram Rai, strategist with Citigroup Inc., said bond investors are increasingly asking about the financial health of Fresno out of concern that the city will seek court protection from its debt obligations and that millions of investment dollars will be lost.

Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy protection this summer.

"Investors worry about contagion," Rai told the Bee. "Many California cities are in a tough situation."

Fears about Fresno in the trading world were reported in Citigroup's investment strategy report, which this month said that "the harsh spotlight (of potential bankruptcy) has shifted to Fresno."

The comments were seized by a handful of nationally syndicated news outlets, which fueled further speculation of Fresno's impending march to Chapter 9, the public version of Chapter 11.

Many news reports suggested that bankruptcy has become an increasingly convenient -- and less vilified -- path for cash-strapped cities.

But Rai says that Chapter 9 remains a very harsh option with expensive legal fees and loss of access to borrowing. It also creates uncertainty for city leaders and employees well into the future.

"We strongly disagree that the Chapter 9 filing is losing its stigma," he said.

Fresno leaders have an equally grim view of bankruptcy and insist it won't happen here.

While Mayor Ashley Swearengin months ago raised the specter of a declaration of fiscal emergency -- a preliminary step to possible a bankruptcy filing -- City Hall has since passed a new, austere budget plan and sought to distance itself from Chapter 9.

"I can assure you that is nowhere in our plans," Swearengin said.

Council Member Lee Brand, the council's most avid bean-counter, said the city's finances are precarious but not lethal.

"Bankruptcy is the last thing we want to do," he said.

Citigroup's strategy report defines the problem for California cities: high fixed costs, such as pensions and compensation, combined with weak tax revenues.

Proposition 13, the state's landmark tax initiative that caps property assessments, further strains municipalities, Rai said.

Rai tells investors that Fresno, which is not alone, faces limited revenue options, forcing an over-reliance on spending cuts. Those cuts, he said, could prove difficult going forward as most services already are reduced.

But, he said, Chapter 9 is by no means inevitable for the city. In fact, he said, there are bright spots on Fresno's ledger, such as having one of the more well-funded pension plans.

Citigroup's strategy report suggests that fears of bankruptcy could cause municipal bonds to trade lower. But if Chapter 9 is avoided, the low prices also could present an attractive option for investors.

Adding fuel to bankruptcy speculation is the recent downgrade by Fitch Ratings of several city bond deals from A minus to BBB plus. These deals include No Neighborhood Left Behind, Convention Center improvements and public safety projects.

Fitch analysts cite the same concerns as bond-watchers: depleted reserves, a weak local economy, an expensive police contract that doesn't expire for three years and lots of bond deals signed during a rosy economy that's now only a memory.

But now, Swearengin said, the city has a solid plan to put its finances in order. "It'll take a solid execution."

The City Council last month approved Swearengin's $232 million budget even though it required tenuous assumptions to balance.

Those assumptions include a $4 million wage/benefit concession from the police union. The two sides saw their informal talks collapse weeks ago, and Swearengin said she is working on plans to fill the gap.