HALF MOON BAY, CALIF. - Half Moon Bay isn't declaring bankruptcy. Full stop. End of story.

But there is no full stop on the Internet, and the story of Half Moon Bay's bankruptcy just won't die, no matter how hard city leaders try to beat it back.

They tried this week. The City Council held a public hearing Tuesday night, where a leading bankruptcy lawyer explained why the city wouldn't be eligible for bankruptcy protection. (It's not insolvent.)

Every public comment on the issue urged the council to reject bankruptcy. The mayor and council members publicly explained their opposition to a filing. They unanimously passed a policy statement saying they weren't filing.

"We are not giving in to bankruptcy," said Mayor John Muller. "I just don't see how that's a feasible option."

The irony is that the attempt to kill the story just made it bigger.

Seeing bankruptcy attorneys on the local City Council agenda, the San Mateo Daily Journal newspaper previewed the meeting under the headline, "City explores bankruptcy." That led to The Wall Street Journal's bankruptcy Blog to include the city in its "Troubled Municipality Roundup."

Full disclosure: The Bond Buyer ran a story debunking bankruptcy rumors a May 8, but mistakenly included Half Moon Bay on the short list of cities that really were actively considering bankruptcy. The paper corrected its Web site about 12 hours later and ran a correction in the printed newspaper the next day.

No matter. At least one blogger cut and pasted the entire original story onto his site and hasn't responded to e-mails requesting that he at least steal the corrected version of the story.

The bankruptcy story got started when Half Moon Bay leaders consulted bankruptcy attorneys in the wake of a $41.6 million legal judgment the city lost to a local developer. Some locals, who hated the idea of paying off the developer after a bitter land-use battle, urged that the city follow Vallejo, Calif., into bankruptcy.

Bankruptcy lawyers told city leaders that probably wouldn't work. The city has ample reserves and - assuming it quashes bankruptcy rumors - the ability to borrow.

"You have the ability to fix your problem," Marc Levinson, an Orrick Herrington & Sutcliffe LLP bankruptcy lawyer, said at Tuesday's council meeting. Herepresents Vallejo in the biggest municipal bankruptcy since Orange County, Calif.'s filing in 1994.

He also warned that bankruptcy wouldn't really solve the problem.

"Bankruptcy can buy you time to work out your problems, but it doesn't make the judgment go away," Levinson said. Half Moon Bay would still have to pay the developer as much as it can possibly afford to pay, and it would have to pay millions in legal fees.

But until recently, local leaders - who were negotiating a reduced settlement and seeking state aid to pay the settlement - didn't move to quash the bankruptcy rumors. Council member Naomi Patridge said she was frustrated that the council couldn't fully address details of the case while the city was negotiating a settlement.

The threat of an appeal or a bankruptcy helped Half Moon Bay negotiate a deal that settled the case for about $18 million, less than half of the original judgment. The city now plans to sell judgment obligation bonds to pay the debt off, and it needs both local residents and investors to know that bankruptcy was never really an option to avoid paying the debt.

"The bill is due. Half Moon Bay is going to pay it," said Mayor Muller.

The city cut its $11 million general fund budget by about $1.75 million to make room for debt service payments and to offset declining tax collections.

With no other debt to speak of, high wealth levels and a convincingly balanced budget, Half Moon Bay's judgment obligation bonds garnered a AA-plus rating from Standard & Poor's earlier this month.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.