SAN FRANCISCO — Stockton is not alone. The ski town of Mammoth Lakes is also using a new California state mediation law to try to avert Chapter 9 bankruptcy.
City leaders decided last month to use the mediation process specified in last year’s Assembly Bill 506 as a last-ditch effort to try to restructure a $42 million judgment it lost to a developer, which has left the town of 8,200, with an annual budget of $16 million, near bankruptcy.
The decision on Feb. 15 makes it one of two municipalities in the state, along with Stockton, to try to use the law that requires a municipality to either hold “neutral” negotiations with creditors for at least 60 days or make a public declaration of a fiscal emergency before it can file for Chapter 9.
“Our issue is from one particular source,” interim town manager Marianna Marysheva-Martinez said during a phone interview. “If it wasn’t for [the judgement], we would have negotiated other debts through the normal course of action.”
Until this week, Stockton had been thought of as the sole tester of the new mediation law.
But other governments with long-standing problems, like Mammoth Lakes, may be interested in the new tool for addressing them.
“There are many municipalities actually watching what is happening with Stockton and how the AB 506 process works,” said Karol Denniston, a managing partner with Brownstein Hyatt Farber Schreck LLP in Los Angeles. “There is a lot more activity that is under the surface.”
Mammoth Lakes is best known as the base for the Mammoth Mountain ski resort, which caters primarily to Los Angeles residents who make the six-hour drive.
In 2008, the Superior Court in Mono County awarded $30 million plus interest and attorney fees to a developer who sued Mammoth Lakes, saying the town breached a contract tied to a development near its airport.
The state Supreme Court last year declined to hear the city’s final chance at appeal.
Several preceding negotiations between the town and the developer failed and the developer has asked a state court for a writ for immediate payment of the full $42 million.
Marysheva-Martinez said the town sent letter last month to the developer, Mammoth Lakes Land Acquisition, notifying them of the mediation.
She said letters would go out this week to other interested parties, including bondholders and employee unions, inviting them to the negotiations.
“We are not sure what if anything we would be asking for on the bond side,” Marysheva-Martinez said.
The town had $3.4 million of outstanding certificates of participation as of June 30, 2010, according to its latest comprehensive annual financial report. It has never issued any general obligation or revenue bonds.
Mammoth Lakes hired the law firm Fulbright & Jaworski LLP to help it with negotiations.
Marysheva-Martinez said it is unknown how much the mediation process might cost, though the city government has budgeted $400,000 for legal and consulting costs.
She said Mammoth Lakes has spent around $5 million on legal expenses related to the lawsuit.
The city is facing a current budget shortfall of $700,000 and estimates a $2 million deficit for next year, mainly because of a lousy winter in which the ski town has so far experienced the smallest snowfall in decades, cutting into hotel taxes, its largest source of revenue.
Municipal bankruptcies are still rare in California. Vallejo filed for Chapter 9 bankruptcy in 2008, Desert Hot Springs filed in 2001 and Orange County filed the state’s largest ever bankruptchy case in 1994.
The San Francisco Bay Area suburb of Hercules may be another candidate. Its city manager said last month the government is on the edge of bankruptcy.
Hercules’ redevelopment agency last month failed to make a $2.4 million debt service payment and the city is facing a lawsuit from Ambac Assurance Corp. that could tip its finances in the direction of Chapter 9.