Mike Busch, president of Urban Futures and the city's financial advisor in the bankruptcy, said that city officials hope to be caught up on audited financial statements by fourth quarter 2014.

LOS ANGELES — For bankrupt San Bernardino, Calif., it's still one step forward, two steps back.

The city posted its comprehensive annual financial report for 2011-12 on the Municipal Securities Rulemaking Board's EMMA website Monday afternoon; then city leaders failed to pass a budget at Monday night's council meeting.

The San Bernardino City Council postponed a vote on its $131 million budget to next Monday's meeting - the last day of the fiscal year.

The current proposal is for the council to pass the budget that day, or pass a continuing resolution that approves each department to spend one-twelfth of the fiscal 2014-15 budget, giving the city an additional 30 days to formalize the budget.

The city's attorneys told council members that the second option could hurt the city in bankruptcy court, because creditors could question the city's progress in moving toward a plan to exit bankruptcy.

"That will have implications in bankruptcy court," said Chief Deputy Attorney Jolena Grider during the council meeting broadcast on the city's website. "Your creditors will use that against you."

The city just completed its 2011-12 CAFR and Mike Busch, president of Urban Futures and the city's financial advisor in the bankruptcy, said in an emailed response that city officials hope to be caught up on audited financial statements by fourth quarter 2014.

The budget process stalled after the introduction of a plan to cut the city's code enforcement division in half. The positions would be moved to the police department where officers would enforce crime-free multi-housing. The last minute change was proposed by Police Chief Jarrod Burguan and Community Development Director Mark Persico, who oversees code enforcement for the city.

The budget is supposed to include $10.6 million in payments to creditors, according to Michael McKinney, chief of staff for Mayor Cary Davis. The budget documents that were available did not have a break down on which creditors would be paid what amounts. The largest creditors are bondholders, fire and police unions, and the pension fund.

As of June 30, 2012, the city had bonded debt outstanding of $81 million and additional debt of $116.1 million, according to the 2011 audited financial report, its most recent. Bonded indebtedness included $46.1 million of pension obligation bonds and $25.1 million certificates of appreciation.

The city's long-term liabilities decreased by $174.2 million or 46.4%, including a decrease in long-term debt of $120.2 million, or 56%, during the fiscal year as a result of the Economic Development Agency dissolution and the transfer of related tax allocation bonds of $130 million to the successor agency. The SA as a separate entity, is reported as a fiduciary fund, and is not included as part of the government-wide statements, according to the audited financial report for fiscal year 2011-12.

All of the state's redevelopment agencies were dissolved effective Feb. 1, 2012.

San Bernardino's EDA, which administered redevelopment activities for the city, ceased operations on that date. All redevelopment activity was transferred to a successor agency for administration of the dissolution, and all other EDA activities were assumed by the city.

"The impact of this process was a significant reduction in assets and liabilities on the city's books, and the loss of on-going property tax increment revenues," according to the audited financial report.

San Bernardino attorneys filed a lawsuit against the state in September 2013 in an attempt to use its ongoing bankruptcy case to win the redevelopment dispute with the state. State officials recently received a favorable ruling from a judge on one aspect of the case.

U.S. District Court Judge James Otero ruled June 6 that the bankruptcy court erred in denying the state's Eleventh Amendment sovereign immunity arguments and remanded the case for further proceedings. San Bernardino was attempting to make the redevelopment agency part of its bankruptcy. U.S. Bankruptcy Judge Meredity Jury had ruled on Sept. 11, 2013 that the city and the succesor agency to its redevelopment agency are separate entities, making it a non-bankruptcy court issue. She also left the door open for the city to refile on the issue. It was her ruling on the second filing that Otero reversed. He agreed that the city and successor agency are two separate entities, which means the city has not standing to sue the state. On the 11th amendment issue, he found in favor of the state on the amendment, which protects state sovereignty.

State officials contend that San Bernardino inappropriately held on to $15 million that belonged to the former city redevelopment agency and should be redistributed to school districts, special districts, and every other municipal entity that receives a split of property taxes, including the city itself.

State statutes limit the amount of general obligation debt a city may issue to 15% of its total assessed valuation. The current debt limitation for the city is $179.5 million, which is significantly in excess of the city's outstanding general obligation debt of $55.4 million, according to the financial report.

The pension obligation bond creditors, which include Ambac, Assurance Co., Erste Europaische Pfandbrief-und Kommunalkreditbank AG and Wells Fargo NA, came out in support of the city's efforts to seek bankruptcy protection in an August 2013 hearing. Since then, their attorneys have taken a low profile in the case.

The POB creditors are interested parties, because of their roles with respect to the city's issuance of $50.4 million in taxable pension obligation bonds to refund the city's obligations to CalPERS, according to the filing.

Previous filings have indicated that efforts for the city to strike an agreement with CalPERS took center stage in the confidential mediation process that began on Nov. 24.

The city reached a tentative agreement with CalPERS related to back payments owed the pension fund totalling $13 million last week.

According to EMMA notices, scheduled interest payments of $1.01 million each on San Bernardino pension obligation bonds went unpaid on Oct. 1, 2012, April 1, 2013, and Oct. 1, 2013, placing the city in default.

Wells Fargo Bank is the trustee on the bonds.

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