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Dennis J. Hayes, Esq. Bar No. 123576 Christopher H. Conti, Esq. Bar No. 275032 Hayes & Cunningham, LLP 5925 Kearny Villa Road, Suite 201 San Diego, California 92123 Telephone: (619) 297-6900 Facsimile: (619) 297-6901 Attorneys for Party in Interest San Bernardino Public Employees Association UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION In re: CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO. 6:12-bk-28006 MJ CHAPTER 9 SAN BERNARDINO PUBLIC EMPLOYEES ASSOCIATIONS OBJECTION TO DEBTOR CITY OF SAN BERNARDINOS PETITION AND STATEMENT OF QUALIFICATION UNDER TITLE 11 U.S.C. SECTION 109(c) Date: November 5, 2012 (Status Conference) Time: 10:00 a.m. Judge: Hon. Meredith Jury Dept.: 301

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TABLE OF CONTENTS Page(s) TABLE OF AUTHORITIES............................................................................................................... ii-iv MEMORANDUM OF POINTS AND AUTHORITIES ........................................................................ 1 I. INTRODUCTION ..................................................................................................................... 1 II. LEGAL STANDARD ................................................................................................................ 5 III. ARGUMENT ............................................................................................................................. 6 A. The Citys Petition Must Be Denied Because The Petition Does Not Meet The Eligibility Requirements of 11 U.S.C. 109(c) ............................................................... 6 1. The City Is Not Authorized To Be A Chapter 9 Debtor Because It Has Failed To Comply With The Requirements Of Assembly Bill 506 .................... 6 a. The City Was Aware Of Its Dire Fiscal Condition For Years ................... 7 b. The Citys Declaration Of A Fiscal Emergency Was Premature ............. 12 2. The Petition Must Be Denied Because The City Has Failed To Carry Its Burden Of Proving That It Is Insolvent .............................................................. 14 a. The Citys Proof Of Its Financial Condition Is Unreliable....................... 15 b. The City Failed To Take Reasonable Steps To Reorganize Its Organizational Structure ........................................................................... 16 c. The City Budgeted And Spent Itself Into Insolvency ............................... 18 B. The Petition Must Be Dismissed Because It Was Not Filed In Good Faith .................. 21

IV. CONCLUSION ........................................................................................................................ 24

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TABLE OF AUTHORITIES Page(s) FEDERAL CASES First Nat. Bank of Cincinnati v. Flershem 290 U.S. 504 (1934) .................................................................................................................14 In re City of Bridgeport 129 B.R. 332 (Bankr. D. Conn. 1991). ..........................................................................5, 14, 21 In re City of Vallejo 408 B.R. 280 (B.A.P. 9th Cir. 2009)..................................................................................1, 4, 5 In re Cottonwood Water & Sanitation Dist. 138 B.R. 973 (Bankr. D. Colo. 1992) ........................................................................................5 In re County of Orange 183 B.R. 594 (Bankr. C.D. Cal. 1995) .................................................................................5, 21 In re New York City Off-Track Betting Corp. 427 B.R. 256 (Bankr. S.D. NY 2010) ............................................................................5, 21, 23 In re Pierce County Housing Authority 414 B.R. 702 (Bankr. W.D. Wash. 2009). ...............................................................................23 In re Powers 135 B.R. 980 (Bankr. C.D. Cal. 1991) .....................................................................................21 In re Sullivan 165 B.R. 60 (Bankr. D.N.H. 1994). ...............................................................................5, 21, 23 In re Town of Westlake Tex. 211 B.R. 860 (Bankr. N.D. Tex. 1997) ..............................................................................14, 15 In re Valley Health Sys. 383 B.R. 156 (Bankr. C.D. Cal. 2008) .......................................................................................5 In re Villages at Castle Rock 145 B.R. 76 (Bankr. D. Colo. 1990). .......................................................................................21 New York v. United States 505 U.S. 144 ..............................................................................................................................5 FEDERAL STATUTES 11 U.S.C. 101(32)(C) ..................................................................................................................14

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11 U.S.C. 109(c) ...........................................................................................................................1 11 U.S.C. 921(c) ...........................................................................................................1, 4, 21, 23 STATE STATUTES Cal. Govt. Code 53730.3(r)...........................................................................................................6 Cal. Govt. Code 53730.3(u) ..........................................................................................................6 Cal. Govt. Code 53760..................................................................................................................6 Cal. Govt. Code 53760.3.....................................................................................................1, 6, 23

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Cal. Govt. Code 53760.5...........................................................................................................6, 7 Cal. Govt. Code 53760, et seq. .....................................................................................................1 OTHER AUTHORITIES Abby Sewell and Phil Willon, Plenty of Blame On Long Road to San Bernardino Bankruptcy LATIMES.COM, July 12, 2012 ...............................................................................................10 Assembly Bill 506 Bill Tracking Summary 2011 Cal ALS 675 .................................................................................................................1, 7 6 Collier on Bankruptcy p. 900.01 ...................................................................................................5 6 Collier on Bankruptcy p. 900.02[2][d] .................................................................................21, 22 H.R. Rep. 95-595 (1977)..................................................................................................................2 Jim Christie, Authorities Probe San Bernardino, City Mulls Bankruptcy Move REUTERS.COM, July 13, 2012 ..............................................................................................15 Jim Christie and Tim Reid, Bankrupt San Bernardino Halts Payment to CalPERS THOMSONREUTERS.COM, October 19, 2012 ....................................................................22 Jim Christie and Tori Richard, Political Feuds, Denial Drove San Bernardino to Bankruptcy REUTERS.COM, July 15, 2012 ..............................................................................................10 Phil Willon, San Bernardino Seeks Bankruptcy Protection LATIMES.COM, July 10, 2012 ...............................................................................................15 Senate Rules Committee AB 506 Bill Analysis (CA 2011) ...............................................................................................1

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Steven Cuevas, City Attorney Claims San Bernardino Administrators Falsified Budget Information for Years SCPR.ORG, July 12, 2012 .......................................................................................................15 Tori Richard, Bankruptcy: Report Warned of San Bernardino Fiscal Foolishness CALWATCHDOG.COM, July 27, 2012.................................................................................12

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Pursuant to 11 U.S.C. 921(c) and 109(c) of the Federal Bankruptcy Code, San Bernardino Public Employees Association (SBPEA), a public sector labor union and a party in interest in this matter, hereby objects to the City of San Bernardinos (the City or Debtor) Chapter 9 municipal bankruptcy petition. SBPEAs objection is based on the grounds that the City has not carried its burden of demonstrating that it is eligible to file for, and remain in, bankruptcy under the protections of Chapter 9, and that its petition was filed in bad faith. SBPEAs objection is based on the following Memorandum of Points and Authorities, the Declaration of Christine Martin, the Declaration of Christopher H. Conti, along with the exhibits and evidence in support thereof, which are filed and served herewith, and all the pleadings and papers on file in this action, and upon such other matters as may be presented to the Court at the time of the hearing. MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION In 2008, the City of Vallejo filed a Chapter 9 bankruptcy petition and then subsequently moved the bankruptcy court for permission to unilaterally reject its collective bargaining agreements. In re City of Vallejo, 408 B.R. 280 (B.A.P. 9th Cir. 2009). In response to the length, cost, and backlash of Vallejos bankruptcy proceeding, and in light of the potential for a domino effect of municipal bankruptcies, the Legislature passed Assembly Bill 506 (AB 506).1 See Cal. Govt. Code 53760, et seq. Seeking to further restrict a municipal debtors access to Chapter 9, the Legislature sought to require a municipality to participate in a neutral evaluation of its debts for 60 to 90 days. See Cal. Govt. Code 53760.3. The purpose of the neutral evaluation process was to facilitate settlement, shed light on the financial capacity of the debtor, and aid in bringing about a plan to fairly adjust creditor debts so as to avoid the potentially devastating situation of bankruptcy. 2011 Cal ALS 675; 2011 CA AB 506, Sec. 1(a)-(g), a copy of which is attached as EXHIBIT 2. In passing AB 506,
Specifically, Senate Floor Analysis of the AB 506 states, In response to the length, cost, and consequence of Vallejos bankruptcy and the potential for additional municipal bankruptcy filings, labor unions and others want local officials to participate in a neutral alternative dispute resolution process before filing for bankruptcy. Senate Rules Committee, AB 506 Bill Analysis (CA 2011), pp. 6-7, available at http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_cfa_20110909_183215_sen_floor.html, and a true and correct copy of which is attached as EXHIBIT 1 hereto.
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the Legislature found that the filing of a Chapter 9 petition should be a last resort, only to be considered after a municipality has explored other reasonable efforts to avoid the filing of a Chapter 9 petition. Id., Sec. 1(a). On or about July 18, 2012, by joint resolution of the Mayor and the City Council, San Bernardino unexpectedly announced that it would follow the path taken by Vallejo, and more recently Stockton, and file for Chapter 9 bankruptcy. See Declaration of Gorgeann Hanna (Decl. Hanna) Exhibits (Ex.) H & G. Faced with what the City now characterizes as an unforeseeable fiscal cliff, the City found that it would be unable to pay its debts and obligations within the next 60 days, and declared a fiscal emergency. Thereafter, on August 1, 2012, without negotiation or a neutral evaluation of its debts under AB 506, the City fled into municipal bankruptcy. In its Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code (Eligibility Brief), the City sets forth a number of justifications for its unexpected declaration of a financial emergency, and the rapid filing of its August 1, 2012 petition. Specifically, the City contends that it did not discover that it was on the edge of a very deep fiscal abyss until late July of 2012. Eligibility Brief at 2. The City asserts that its fiscal blindness was compounded by the retirement and resignation of key City management personnel, specifically Former City Manager Charles McNeely (McNeely) and Former Finance Director Barbara Pachon (Pachon), the failure to reconcile bank statements for over nine months, and the failure to complete a Certified Annual Financial Report (CAFR) for Fiscal Year (FY) 2010-2011. Eligibility Brief at 3. The general policy considerations underlying Chapter 9 is to allow the debtor a breathing spell from debt collection efforts in order that it can work out a repayment plan with its creditors. H.R. Rep. 95-595 at 263 (1977), reprinted U.S.C.C.A.N 5963, 6221 in 1978. As such, the purpose of Chapter 9 is to allow the municipal unit to continue operating while it adjusts or refinances creditor claims with minimal loss to its creditors. Id. Rather than attempting a good faith adjustment of its debts and obligations, the Citys petition seeks one purpose only to avoid and/or delay its obligations and debts owed a single class of creditors, its current and former public employees. ///
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In light of the facts presented in this case, and the policy considerations underlying both Chapter 9 and AB 506, the Citys Chapter 9 petition must be denied. First, the City has failed to obtain State authorization to be a Chapter 9 petitioner because it has not satisfied the requirements of AB 506. Under AB 506, a municipality may only sidestep the neutral evaluation process via a declaration of a fiscal emergency. Although the City bases its need for a declaration of a financial emergency (in lieu of a neutral evaluation of its debts) on the late discovery of its fiscal condition, the facts show that if the City was blind to its fiscal reality, such blindness was willful. The City was repeatedly warned that the failure to implement fiscally responsible practices and utilize viable revenue enhancements would result in bankruptcy. Instead of acting appropriately, the City adopted a budget for FY 2011-12 that was destined to fail, and then waited for a foreseeable crisis to become a reality. This is a blatant end-run of the neutral evaluation process. If the municipality has advanced knowledge that bankruptcy was a real possibility (rather than a mere theoretical alternative), AB 506 requires a municipal debtor to engage its creditors in a neutral evaluation of its debts for no longer 60 days, unless the parties wish to extend the mediation process for an additional 30 days. If a fiscal emergency suddenly comes upon the municipality without advanced notice, leaving no time for a neutral evaluation, then the municipality may declare a fiscal emergency and file its bankruptcy petition. However, a municipality may not fail or refuse to engage in the neutral evaluation process if knows that bankruptcy is a real possibility 60 days prior to filing a petition. Nor can a municipality knowingly create a fiscal emergency overtime by intentionally running its finances into the ground and then claim the filing of a petition is appropriate because of the resulting, albeit predictable, fiscal emergency that ensues. As set forth more fully below, this is exactly what the City did. Because the City failed to comply with AB 506, it does not have the permission of the State of California to file its petition, and therefore, the petition must be dismissed. Second, the City has not satisfied the insolvency requirement of Section 109(c)(3). As a preliminary matter, the City has not produced reliable evidence of its financial condition. In fact, the Citys most recent audited financial statements are for FY 2009-10. The City is yet to produce audited financials or a CAFR for FY 2010-11, thus asking the Court and its creditors to accept unaudited financials at face value. When viewed in light of the Citys admissions of widespread
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financial fraud and accounting errors, the legitimacy of the Citys financials for FY 2010-11 and FY 2011-12 is tenuous at best. Additionally, the City budgeted and spent itself into insolvency so as to violate the requirements of Section 109(c)(3). The City should have foreseen that it was spiraling towards bankruptcy when it adopted its FY 2011-12 budget. In fact, since FY 2001-02, General Fund expenditures have outpaced revenues in an unsustainable manner. As of June 30, 2010, the Citys General Fund held a mere $2,102.00 of liquid cash reserves, and in 2010, had projected budget deficits of nearly $40,000,000.00 for FY 2012-13. Yet, the City willfully ignored viable revenue enhancements and cost-cutting strategies for years in the face of severe financial strain. Chapter 9 is not a substitute for political will. Without the benefit of formal discovery, SBPEA believes the facts will show that the City could have done, and should have done, much more to avoid the last resort of Chapter 9 bankruptcy. Finally, the petition must be dismissed pursuant to Section 921(c) of the Bankruptcy Code because the petition was not filed in good faith. A review of the Citys Pre-Pendency Plan reveals that through its petition, the City seeks to wage war on its current and former public employees. In failing to address the impairment of obligations owed to its bondholders, the petition exclusively targets its workforce for massive reductions and impairments. Significantly, the City is the first municipality to refuse to honor mandated payments to California Public Employees Retirement System (CalPERS). Even in the heavily litigated Chapter 9 proceedings of Vallejo and Stockton, the former of which moved to unilaterally reject its collective bargaining agreements, both municipalities honored their mandated pension payments. The Citys attempt to exclusively impair obligations owed to the public sector, its failure to come to the bargaining table, and its refusal to take part in the AB 506 process reveals the nature and purpose of the petition: to scapegoat public employees for its political, organizational, and financial failure. /// /// /// ///
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II.

LEGAL STANDARD Pursuant to Section 921(c) of the Bankruptcy Code, a Chapter 9 bankruptcy petition must be

dismissed if (1) the debtor has not carried its burden of proving that it has met the eligibility requirements of Chapter 9; or (2) the petition was not filed in good faith. 11 U.S.C. 921(c); In re City of Vallejo, 408 B.R. at 289 (observing that courts require the dismissal of Chapter 9 petitions filed by debtors who fail to meet the eligibility requirement under 109(c)); In re Valley Health Sys., 383 B.R. 156, 160 (Bankr. C.D. Cal. 2008). Section 109(c) of the Bankruptcy Code sets forth the requirements that a municipality must satisfy in order to become eligible as a Chapter 9 petitioner: (1) The debtor must be a municipality; (2) The debtor is specifically authorized under State law to be a Chapter 9 debtor; (3) The debtor is insolvent; (4) The debtor desires to effect a plan to adjust its debts; and (5) The debtor has negotiated in good faith with its creditors or has satisfied one of the three statutory alternatives. 11 U.S.C. 109(c); In re New York City Off-Track Betting Corp. (In re New York OTB), 427 B.R. 256, 263-64 (Bankr. S.D. NY 2010). A municipality who has filed for the protections of Chapter 9 bears the burden of establishing that its petition satisfies all five requirements of Section 109(c). In re City of Vallejo, 408 B.R. at 289 (citing In re Valley Health Sys., 383 B.R. at 161); In re County of Orange, 183 B.R. 594, 599 (Bankr. C.D. Cal. 1995) (citing In re City of Bridgeport (In re Bridgeport), 129 B.R. 332, 339 (Bankr. D. Conn. 1991)). Because the congressional intent underlying Chapter 9 is to provide municipalities with limited access to the bankruptcy court, Chapter 9 petitions should be viewed with a jaded eye. In re Cottonwood Water & Sanitation Dist., 138 B.R. 973, 979 (Bankr. D. Colo. 1992) (Congress consciously sought to limit accessibility to the bankruptcy court by municipalities); In re New York OTB, 427 B.R. at 264 (citing 6 Collier on Bankruptcy P 900.01; New York v. United States, 505 U.S. 144, 155-66). As one court stated, a bankruptcy courts jurisdiction [s]hould not be exercised lightly in Chapter 9 cases Considering the bankruptcy courts severely limited control over the debtor, once the petition is approved, access to Chapter 9 relief has been designed to be an intentionally
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difficult task. In re Sullivan County Regl Refuse Disposal Dist. (In re Sullivan), 165 B.R. 60, 82 (Bankr. D.N.H. 1994). III. ARGUMENT The only issues to be decided by the Court are: (1) whether the City has carried its burden in proving it is eligible to be a Chapter 9 debtor; and (2) whether the City has carried its burden of proving that its petition was filed in good faith. After a review of the papers and documents filed by the City in support of its petition, SBPEA submits that the City does not qualify for the protections of Chapter 9. More specifically, the City has not demonstrated that the State has authorized it to be a Chapter 9 debtor, the City has not proven that it is insolvent, and the City has not demonstrated that its petition is brought in good faith. Based on the following, this Court should sustain this herein objection and deny the Citys Chapter 9 petition. A. The Citys Petition Must Be Denied Because The Petition Does Not Meet The Eligibility Requirements of 11 U.S.C. 109(c) 1. The City Is Not Authorized To Be A Chapter 9 Debtor Because It Has Failed To Comply With The Requirements Of Assembly Bill 506 Effective January 1, 2012, the State will only authorize a municipality to file a Chapter 9 petition if, (a) The local public entity has participated in a neutral evaluation process pursuant to [Cal. Govt. Code] Section 53760.3, or (b) The local public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board pursuant to [Cal. Govt. Code] Section 53760.5. Cal. Govt. Code 53760. Therefore, AB 506 requires a municipal debtor to engage its creditors in a neutral evaluation of its debts for no longer 60 days, unless the parties wish to extend the mediation process for an additional 30 days. Cal. Govt. Code 53730.3(r). If the 60-day period expires and a resolution is not reached, the debtor may then file its petition. Cal. Govt. Code 53730.3(u). If a municipality does not to partake in the neutral evaluation process it is not authorized to file a Chapter 9 petition unless it declares a fiscal emergency pursuant Cal. Govt. Code 53760.5.2 Such a declaration requires that the municipality make a public finding that it is or will be

A local public entity satisfies Cal. Govt. Code 53760.5 if (1) it declares a fiscal emergency and adopts a resolution by a majority vote at a noticed public hearing; (2) declares that the financial state of the local
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unable to pay its obligations within the next 60 days, which is the same amount of time that the neutral evaluation process is to take place. Cal. Govt. Code 53760.5. In passing AB 506, the legislature manifested clear intent that a municipality must consider Chapter 9 bankruptcy as a last resort, only after reasonable efforts have been made to avoid bankruptcy. See 2011 Cal ALS 675; 2011 CA A.B. 506, Sec. 1(a); see Ex. 2 attached hereto. The legislative history of AB 506 states: California's taxpayers who rely on public safety, senior, recreational, municipal health, library, and other public services, as well as those who own and operate businesses in our communities, deserve every reasonable and appropriate effort that state and local government can make to avoid adverse consequences of Chapter 9 bankruptcy filings, particularly where a neutral evaluation may lead to the avoidance of Chapter 9 filing by an out-of-court resolution of outstanding obligations and disputes. Id., Sec. 1(e). As set forth below, the City was well aware that it had a fiscal crisis on its hands for years prior to its July 18, 2012, declaration of fiscal emergency. Because the City chose not to partake in the neutral evaluation process of AB 506 for 60 to 90 days prior to declaring a fiscal emergency, and failed to implement reasonable measures to maintain liquidity, the City has circumvented the intent and purpose of AB 506. a. The City Was Aware Of Its Dire Fiscal Condition For Years

The City concedes that it did it partake in the AB 506 neutral evaluation process. See Statement of Qualifications Under Section 109(c), 2; Eligibility Brief at 31. Instead, the City contends that it has complied with the requirements of AB 506 because it declared a fiscal emergency and adopted a resolution by a majority vote of its Common Council pursuant to Cal. Govt. Code 53760.5. Eligibility Brief at 20. In support of the need for a declaration of a fiscal emergency, the City alleges it was unaware of its liquidity crisis and budget deficit until late June of

public entity jeopardizes the healthy, safety, or well-being of the residents absent the protections of Chapter 9; (3) makes a finding that the public entity is or will be unable to pay its obligations within the next 60 days, and (4) places an item on the agenda of a notice public hearing on the fiscal condition of the entity and takes public comment.
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2012. Eligibility Brief at 3, 20. The Eligibility Brief sets forth a laundry list of justifications in support of its fiscal ignorance, including, (1) the May 2012 resignation of McNeely and the December 2011 retirement of Pachon; (2) the Citys belief that it faced a budget deficit of only $3.1 million as of April 2012; (3) the Citys failure to perform monthly reconciliation of bank statements for the General Fund for over nine months; (4) the Citys failure to complete a CAFR for FY 201011; and (5) the fact that General Funds balances at the start of the FY 2010-11 and FY 2011-12 had been erroneously reported by $4.5 million. Eligibility Brief at 2-3. Without the benefit of discovery, the allegations that the Citys fiscal condition went undiscovered until late July of 2012 do not stand up to the independent facts. Seeking to analyze the avalanche of documents produced by the City, SPBEA engaged Harvey M. Rose Associates, LLC (HRA), a renowned public sector management consulting firm based in San Francisco. At the conclusion of its analysis, HRA found that the Citys deficits and fiscal condition were neither unexpected, nor sudden. Declaration of Christine Martin (Decl. Martin) 35. HRA found that the Citys General Fund had been experiencing a deficit every single year since FY 2001-02, and had experienced serious financial stress since FY 2007-08. Decl. Martin 15, 33. Based on the audited financial statements for FY 2007-08, the General Fund had a cash balance of $0.00 on June 30, 2008, yet General Fund expenditures were averaging $11.9 million. Decl. Martin 33. Furthermore, as of June 30, 2010, the Citys General Fund balance was $410,293.00, or 0.3% of annual General Fund expenditures. Decl. Martin 15. As for cash on hand, the Citys General Fund held a mere $2,120.00 as of June 30, 2010. Decl. Martin 29. In addition, HRA made the following determinations: The Citys General Fund balance experienced a drastic decrease of 84.9% from FY 2009 to FY 2010. Decl. Martin 9; The City reported a negative unaudited General Fund balance of $1,181,603.00 as of June 30, 2011. Decl. Martin 12; The budget initially adopted for FY 2011-12 shows a decrease in fund balance of $760,400.00. Decl. Martin 13; Expenditures exceeded the original budget in FY 2011-12 by $14.5 million, or 11.5%, thus
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demonstrating a complete lack of budgetary control during that year. Decl. Martin 13; The Citys negative cash balance of $18.3 million should have been foreseeable because it is the accumulation of moneys owed to other funds as of June 30, 2010, plus FY 2010-11 and FY 2011-12 operating deficits. Decl. Martin 14; Most of the increase in the Citys budgetary deficit was a result of the City choosing to fund long-term liabilities that have historically been unfunded. These newly funded liabilities do not require cash payments. Decl. Martin 31(c); As of June 30, 2010, the Citys Internal Service Funds had a negative balance of $7.8 million and held only $59,019.00 in cash. Decl. Martin 19. HRA also compared the Citys financials with 10 other California peer cities to determine the Citys fiscal condition.3 HRA found that in FY 2009-10 the Citys General Fund balance in proportion to annual expenditures was 0.3%, by far the lowest of the peer cities, who had an average General Fund balance in proportion to annual expenditures of 56.6%. Decl. Martin 26. The next lowest was Modesto, with an average General Fund balance in proportion to annual expenditures of 15.5%. Decl. Martin 26. The City also had a fund balance of about $2.00 per capita, again by far the lowest by a wide margin. The average per capita fund balance among peer cities was $308.00 per capita, the next lowest being Modesto at $74.00. Decl. Martin 27. Appallingly, among all 11 cities, San Bernardino ranked fourth highest in General Fund expenditures, spending $619.00 per capita. Decl. Martin 28. Finally, as mentioned above, the Citys cash balance as of June 30, 2010 was $2,120.00, or 0.0% of annual General Fund expenditures. Decl. Martin 29. On average, the Citys peers held 39.9% of its General Fund expenditures in cash, with the next lowest being Modesto, who had available cash of $5.8 million. Decl. Martin 29. Based on its findings, HRA opined that the events leading up to the Citys current fiscal crisis could not have been sudden or unknown, and that the City Council and City management should have acted much earlier and more aggressively to preserve its assets. Decl. Martin 33-35. In light of HRAs analysis, the Citys contention that it was unaware that it was standing on a fiscal cliff until late July 2012 is simply

The peer cities used for comparison in the HRA Report include Santa Clarita, Fontana, Glendale, Irvine, Moreno Valley, Huntington Beach, Oxnard, Chula Vista, Fremont, and Modesto. Decl. Martin 7.
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false. The City knew it was a sinking ship for years prior to July of 2012. HRAs conclusions are corroborated by the statements and projections made by McNeely and Pachon. In March of 2010, the City held a midyear budget meeting, at which time McNeely and Pachon presented a five-year General Fund outlook that predicted a shortfall of $23.7 million for FY 2010-11. SB 340. Thereafter, on August 23, 2010, McNeely and Pachon made a presentation to City officials entitled, Fiscal Year 2010-2011 Budget Discussions. SB 188. The presentation forewarned City officials of an inevitable fiscal crisis, stating that City finances were exhibiting Symptoms of Bankruptcy. SB 194. Among these symptoms were a lack of sustainable cash flow, low or no General Fund reserves, structural budget problems, the continuous borrowing from restricted funds to balance the budget, using one-time funds to offset ongoing revenues, and a need to renegotiate concessions with union groups.4 Id. The presentation also summarized a 5-Year General Fund Projection, and projected deficits of $24,441,000 in FY 2010-11, $32,762,600 in FY 2011-12; $38,762,600 in FY 2011-12; and nearly $46,000,000 in FY 2013-14. SB 212. Prophetically, the reports projected deficit of nearly $40 million dollars for FY 2011-12 is not so far removed from the $45 million that the City now claims to be blindsided by. Following his March 2012 resignation, McNeely expressed frustration with the Citys lack of fiscal discipline and political will. In reference to his 2010 presentation, McNeely publically stated, I dont know how you could come out of that meeting not understanding we had a serious problem...I told them, Youre headed for trouble, its a train wreck, you cant keep doing business this way. Jim Christie & Tori Richards, Political Feuds, Denial Drove San Bernardino To Bankruptcy, REUTERS.COM, July 15, 2012, and a copy of which is attached as EXHIBIT 3 hereto. Concerning the looming specter of bankruptcy, McNeely publically commented, I told the council two years in a row that, if this continues, were going to be looking at bankruptcy. I got criticized for

McNeely characterized the financial philosophy within the City, i.e. allowing spending to consistently outpace revenues for years without significant change, as The Groundhog Day Effect. SB 196. As former city council member, Tobin Brinker, put it, [McNeely] used that analogy because the city had every year been doing the same stupid things. Jim Christie and Tori Richard, Political Feuds, Denial Drove San Bernardino to Bankruptcy, REUTERS.COM, July 15, 2012, available at http://www.reuters.com/article/2012/07/15/us-usa-san-bernardino-bankruptcy-causesidUSBRE86E0JA20120715, and a copy of which is attached as EXHIBIT 3 hereto.
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bringing up the word bankruptcy. They called it a scare tactic. Abby Sewell and Phil Willon, Plenty of Blame On Long Road to San Bernardino Bankruptcy, LATIMES.COM, July 12, 2012, available at http://articles.latimes.com/2012/jul/12/local/la-me-san-bernardino-20120713, and a copy of which is attached as EXHIBIT 4 hereto.5 McNeelys warning of impending fiscal crisis in 2010 could not have been unexpected by City officials. In 2007, the City engaged Management Partners to examine government operations to identify opportunities for improving organizational efficiency and generate savings in operating costs. SB 5996. In March of 2007, Management Partners issued a report entitled City of San Bernardino Organizational Review (the 2007 Report). The 2007 Report made numerous findings of instability, emphasizing a need for an overhaul of the Citys political and management superstructure,6 and finding that the Citys finances were under severe fiscal distress.7 SB 60046005. Of the 187 recommendations made in the 2007 Report, the first and foremost recommendation was the need to modernize the political and management superstructure. The 2007 Report emphasized, [I]f the city is committed to become an efficient and aligned organization, then it must make major changes to the overarching way it is organized, and that the consequence of making little or no changes in the structure of governance will side-step the most important issue that needs to be addressed to allow the City of San Bernardino to become a cost-effective, progressive and sustainable government. SB 6029. In March of 2010, Management Partners issued a follow-up report entitled Status Update to 2007 Organizational Review (the 2010 Report). See SB 5865; see also SB 5928. Summarily, the 2010 Report found that the City had only implemented 34% of the recommendations over a period of three years and had disregarded Management Partners most important recommendation; the need to

Although the above-referenced statements by McNeely lack considerable weight, SBPEA has not yet had the benefit of formal discovery. Based on the totality of the circumstances, SBPEA believes discovery will reveal the truth of the matters asserted. 6 The 2007 Report stated, Management Partners believes that modernizing business practice is far and away the most critical change that the City needs to make if it is to become a progressive, efficient and sustainable government. SB 6004. 7 The 2007 Report noted, it is questionable whether the City can maintain funding for existing program service levels, and there are unmet needs that are becoming critical. The policy framework of the Citys financial management system requires immediate attention. SB 6004-6005.
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streamline the Citys organizational structure.8 SB 5927. In light of the warnings of Management Partners, and the Citys refusal to implement their compulsory recommendations, it defies reason that the City contends it was unaware of an impending fiscal collapse. Based on the analysis provided by HRA, the reports provided by Management Partners, and the documents voluntarily produced by the City, it is a foregone conclusion that City officials knew back in FY 2009-10 that municipal bankruptcy was a rapidly approaching inevitability. As AB 506 became effective January 1, 2012, the City had seven months to engage in the 60-day neutral evaluation process with its creditors prior to filing its August 1, 2012, petition.9 Instead, the City opted to languish in inaction during this period, knowing that its unsustainable spending was a runaway train. Conveniently, the City now asserts the unawareness of its fiscal condition caused it to flee into bankruptcy without mediation or negotiation. In reality, it is virtually impossible that the City was unaware that it had an impending financial crisis on its hands. Had the City treated bankruptcy as a last resort, it would have engaged in the neutral evaluation process when it had ample time to do so. As such, the City does not meet the eligibility requirements of Section 109(c)(2) because it is not authorized by the State to be a Chapter 9 debtor. b. The Citys Declaration Of A Fiscal Emergency Was Premature

Based on the findings of HRA, the City has taken an extreme position that reductions in service levels created a fiscal emergency as stated in the Pre-Pendency Plan. As HRA found, if the Citys questionable budget and cash deficit projections are correct, it is likely that the City could have implemented reasonable measures to maintain liquidity for 60 days following its July 18, 2012,

With reference to the Citys inaction to the recommendations of Management Partners, former council member, Tobin Brinker, stated, It was very frustratingWe were being presented with a stark future of the citys financial future and in the springtime had a beautiful vision of the city of what we all wanted. We couldnt come together. It was very, very clear. They laid it out for us: Bankruptcy is coming and you have to do something. Tori Richard, Bankruptcy: Report Warned of San Bernardino Fiscal Foolishness, CALWATCHDOG.COM, July 27, 2012, available at http://www.calwatchdog.com/2012/07/27/bankruptcy-report-warned-of-san-bernardino-fiscal-foolishness/, and a copy of which is attached hereto as EXHIBIT 5. 9 In the Citys Budgetary Analysis and Recommendations for Budget Stabilization Report, the Citys SWOT Analysis acknowledged the need to initiate a neutral evaluation process under AB 506 as a threat to its go-forward plan. SB 113. This characterization of the neutral evaluation process only further solidifies the Citys desire to avoid engaging in mediation with its creditors.
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declaration of a financial emergency. Decl. Martin 31-32. First, the Citys deficit is significantly overstated. In reviewing the FY 2012-13 budget, HRA found that nearly half of the deficit pertains to long-term liabilities that are not a current year cash requirement. Decl. Martin 31(d). For instance, the Citys Summary of Revenues, Expenditures, and Changes in Fund Balance reports a budget increase in General Government expenditures of $16,451,465.00, which increased from the $4,904,500.00 in FY 2011-12, to $21,255,965.00 in FY 2012-13. SB 7058; see also Decl. Hanna Ex. L, Attachment B. This increase is primarily a result of the City deciding to fund long-term liabilities that, until now, had historically been unfunded. Decl. Martin 31(d). Among the increases were $6.7 million for Retiree Health, $4.9 million for General Liability, and $3.3 million for Workers Compensation. Decl. Martin 31(d). Nevertheless, the City now chooses to fund these liabilities as a means of pumping up its deficit in order to segue into a fiscal emergency. Notably, the City reported $9.1 million due from other governments as of June 30, 2010, which is not accounted nor reconciled in the Citys financial statements. Decl. Martin 11, 31(e). An additional $9.1 million, although unexplained, would have significantly improved the Citys cash position. Decl. Martin 11, 31(e). By deciding to fund long-term liabilities in the face of bankruptcy, the City seeks to widen the very gap it calls unbridgeable. Second, the City had options that would have provided it with short-term liquidity. For example, the Citys Fiscal Emergency Operating Plan, dated July 23, 2012, reports that the City had a total cash and investment portfolio of $27 million as of June 30, 2012. Decl. Martin 31(a). The Citys Eligibility Brief fails to address whether these funds were available to solve the Citys shortterm cash crunch. Similarly, the Citys Selected Monthly Cash Flow Analysis (Attachment C to the Fiscal Emergency Operating Plan) only accounts for the General Fund, and there is no discussion of other City funds, such as the Enterprise Funds, which may have a direct financial impact on City finances. Decl. Martin 31(a); see SB 94. As of June 30, 2010, the Enterprise Funds held approximately $252.7 million in assets, most of which were held in the Sewer Fund and the Water Fund. Decl. Martin 22. According to the City Charter, the City may transfer 10% of Water revenues to the General Fund, and in FY 2009-2010, did transfer $2.3 million. Decl. Martin 24. However, as of June 30, 2011, the City did not make a transfer from the Water Enterprise in FY
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2010-11, and it is unclear if any transfer was made in FY 2011-12. Decl. Martin 24. The City had alternatives that would have allowed it to meet its obligations for 60 days following its June 18, 2012, declaration of a fiscal emergency. By choosing to fund historically unfunded, long-term liabilities, and by failing to implement measures to maintain liquidity, the Citys declaration of a financial emergency was premature. Therefore, this court should deny the Citys petition because it has failed to satisfy Section 109(c)(2). 2. The Petition Must Be Denied Because The City Has Failed To Carry Its Burden Of Proving That It Is Insolvent Section 109(c) of the Bankruptcy Code provides that a municipal debtor is eligible for the protections of Chapter 9 if it is insolvent. As defined by Section 101(32)(C) of the Bankruptcy Code, a municipality is insolvent if it is (i) generally not paying its debts as they become due unless such debts are subject to a bona fide dispute; or (ii) unable to pay its debts as they become due. However, a municipality is not permitted to flee into Chapter 9 bankruptcy, thereby circumventing its payment obligations to workers, retirees, and bondholders alike, if a viable nonbankruptcy alternative exists. The abandonment of the political process and the failure to implement revenue enhancements or reasonable cost-cutting alternatives as a means of delaying payment to its creditors is an indication that a municipality does not meet the eligibility requirements of Section 109(c). See In re City of Bridgeport, 129 B.R. at 336 (The answer in the first instances must come from the political process, not the courts). In fact, for the purposes of Chapter 9 eligibility, insolvency cannot be found where a municipality deliberately budgets or spends itself into insolvency, (so as to qualify under 101(32)(C)(ii)) when other viable avenues and scenarios are possible. In re Town of Westlake Tex., 211 B.R. 860, 867 (Bankr. N.D. Tex. 1997) (citing First Nat. Bank of Cincinnati v. Flershem, 290 U.S. 504, 516-17 (1934)). The insolvency requirement of Section 109(c)(3) mandates that City leaders first behave with necessary financial discipline and solve future problems by preserving revenue streams while utilizing viable sources of revenue. In re City of Bridgeport, 129 B.R. at 339. For instance, in In re Town of Westlake, the debtor argued that it was eligible for Chapter 9 bankruptcy under Section 101(32)(C)(ii) because it was unable to pay its debts as they became due.
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In re Town of Westlake, 211 B.R. at 866. Westlakes numbers indicated that it had cash available for expenditures of $1,778,035.00, but that it had purposefully adopted a budget with a projected deficit. Id. In finding that the City failed to carry its burden of proving that it was insolvent, the court concluded that there was insufficient proof of insolvency when a city budgets or spends itself into insolvency without pursuing revenue-enhancing and/or cost-cutting activities. As set forth in both Bridgeport and Westlake, the City is required to explore other realistic avenues and scenarios before fleeing into bankruptcy. a. The Citys Proof Of Its Financial Condition Is Unreliable

As a preliminary matter, the Citys financials are inherently unreliable. Considering the City sets forth accounting errors as one of its justifications for the late discovery of its liquidity crisis, the Citys failure to provide audited financials since FY 2009-10 is alarming. Eligibility Brief at 3. The City also fails to address the widespread allegations of financial fraud perpetrated by City officials for the last decade. For instance, in July of 2012, the San Bernardino County Sheriffs Department released a public statement regarding fraudulent accounting practices that may have occurred in previous years. The Sheriffs Department stated, in part, "Several months ago at the request of San Bernardino City officials, the San Bernardino County Sheriffs Department, along with the San Bernardino Police Department and the district attorneys office began an investigation related to allegations of possible criminal activity within departments of the San Bernardino city government. See Jim Christie, Authorities Probe San Bernardino, City Mulls Bankruptcy Move, REUTERS.COM, July 13, available at http://www.reuters.com/article/2012/07/13/sanbernardino-investigation-

idUSL2E8ICF7J20120713, and a copy of which is attached hereto as EXHIBIT 6. Said statement came off the heels of San Bernardino City Attorney James Penmans own public comments of alleged fraud, in which Penman indicated, We have now learned that for 13 of the last 16 years, documents presented to the mayor and council were falsified. See City Attorney Claims San Bernardino Administrators Falsified Budget Information for Years, Steven Cuevas, SCPR.ORG, July 12, 2012, available at http://www.scpr.org/news/2012/07/12/33229/city-attorney-claims-sanbernardino-administrators/, and a copy of which is attached hereto as EXHIBIT 7. For the last 16 years the budget prepared for the council showed the city was in the black The mayor and the
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council were not given accurate documents." See Phil Willon, San Bernardino Seeks Bankruptcy Protection, LATIMES.COM, July 10, 2012, available at

http://articles.latimes.com/2012/jul/10/local/la-me-0711-san-bernardino-20120711, and a copy of which is attached hereto as EXHIBIT 8. Considering the circumstances, unaudited financial statements should persuade neither the Court, nor the Citys creditors. Second, aside from the inherent weakness in the supporting schedules provided by the City, the documents are riddled with ambiguities and inconsistencies. For instance, HRA found the following: The Select Monthly Cash Flow Analysis (Attachment C to the Fiscal Emergency Operating Plan) represents the General Fund only and does not include other City funds that have a direct financial impact on the Citys overall ability to meet its obligations. Decl. Martin 31(b); see SB 94. The Fiscal Emergency Operating Plan reports a cash and investment portfolio (unaudited) of $27 million as of June 30, 2012, but fails to discuss its availability for short-term cash requirements. Additionally, the Plan fails to address available resources from the Enterprise Funds, whether via loan or direct transfer. Decl. Martin 31(a); see SB 96. The Select Monthly Cash Flow Analysis Measure to Manage Cash Flow (Attachment E to the Fiscal Emergency Operating Plan) details City managements recommendations to reduce General Fund cash outflows. These are not explained, such as why only 20% of the internal service charges are reduced, nor are they maximized. Decl. Martin 31(d). Based on a review of the Citys produced financial records, the findings of HRA, and the widespread allegations of fraudulent and negligent accounting practices, the Citys proof of its cash insolvency is unreliable. Therefore, the City has failed to carry its burden of proven eligibility under Section 109(c)(3). b. The City Failed To Take Reasonable Steps To Reorganize Its Organizational Structure The City had the ability to substantially increase revenues and reduce unnecessary spending. The Citys refusal to implement recommended high dollar saving measures shows a complete lack of political will, and indicates the City did not consider reasonable pre-petition alternatives.
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As discussed in Section (III)(A)(1)(a), supra, Management Partners 2007 Report found that sustainability was dependent on the modernization of Citys organizational structure, and that the City finances were experiencing significant fiscal distress.10 SB 6002-6007. The 2007 Report stated that it was imperative that the City develop a plan to modernize government by clarifying lines of authority, amending the City Charter to transfer hiring/firing responsibility to City Managers, and centralizing City support services to create economies of scale. SB 6029. The 2007 Report also noted that the Citys overall financial position was fragile, as government revenues were growing at a slower rate than expenditures. SB 6030. Therefore, the 2007 Report made 187 recommendations that would aid the City in moving towards sustainable practices. Three years later Management Partners found that the City had only implemented 34% of the recommendations. Of the unimplemented recommendations, the 2010 Report emphasized that the City had failed to address Management Partners primary concern: the need to modernize the Citys government superstructure. SB 5921. A subsequent May 2010 follow-up again stressed the importance of modernization as a means of achieving fiscal sustainable. SB 4158. Specifically the follow-up report stated: The [2007 Report] went on to state that if the City is committed to becoming an efficient and aligned organization, then it must make major changes to the overarching way it is organized. The March 2010 Status Update reported little change in this area. The report stated that the consequence of making little or no change in the governance structure will sidestep the most important issue that needs to be addressed to allow the City of San Bernardino to become a cost-effective, progressive and sustainable government. SB 4161.

The 2007 Report emphasized, the overall theme of this report is that the City government needs to be modernized. The political and management superstructure needs to be streamlined. Its internal organization infrastructure needs to be allocated so that sufficient resources are available to maintain City assets and provide adequate support for workers who serve residents. The financial systems of the City need to be robust enough to promote sound, sustainable fiscal management. SB 5921.
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The May 2010 follow-up report went on to conclude: [T]he organizational structure of the City of San Bernardino remains one of the foremost obstacles to developing the organization into a unified, wellfunctioning operational team. Streamlined, innovative, cost-effective services that are responsive to the interests of the community under the policy guidance of the Mayor and Common Council cannot only be a goal. It must be achieved for the City to be able to serve the public through proper stewardship of limited resource. SB 4163. Despite Management Partners recommendations and warnings, the City watched five years pass by without implementing compulsory changes. This political inaction is the embodiment of Former City Manager McNeelys Groundhog Day Effect. By failing to implement the recommendations of Management Partners the City did not adequately explore reasonable alternatives to the last resort of bankruptcy. c. The City Budgeted And Spent Itself Into Insolvency

As set forth in depth in Section (III)(A)(1), supra, there can be no dispute that the Citys finances were grossly mismanaged. Indeed, in FY 2011-12 the City adopted a budget that it could not possibly balance. The Citys General Fund had been experiencing a deficit every year since FY 200102, and despite having no available cash reserves, the City was spending the fourth most money among its peer cities. Decl. Martin 15, 28. The audited financial statements for FY 2007-08 showed that the General Fund had a cash balance of $0.00 on June 30, 2008, while General Fund expenditures were averaging $11.9 million per month. Decl. Martin 33. A review of the budget initially adopted by the City Council for FY 2011-12 shows a decrease in fund balance of $760,400.00, and even footnotes a loan liability of $3 million that the General Fund balance does not include. Decl. Martin 13. Additionally, expenditures exceeded the original FY 2011-12 adopted budget by $14.5 million, or 11.5%. Decl. Martin 13. In light of these facts, HRA opined that in adopting its FY 2011-12, the City demonstrated a complete lack of budgetary control, and that it should have been foreseeable that the City would have a negative cash balance of $18.3 million as of June 30, 2012. Decl. Martin 13-14. Despite the delays in the latest financial statements, City Council and City management should have known and acted much earlier and more aggressively to
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the financial constraints facing the City. Decl. Martin 33. Instead, it adopted an infeasible budget and then spent itself into insolvency. The Citys failure to act appropriately is further supported by the Citys refusal to implement various recommendations by Management Partners. See SB 6192- 6227. For example, the 2010 Report estimated that increasing the real property transfer tax to the California tax state average would yield $2.5 million annually, amending the City Charter to authorize design-build contracts would yield $1 million, and implementing a light duty program for firefighters over time could yield a savings of up to $700,000.00 annually. See SB 6193, 6217, 6224. Below is a summary of a select few unimplemented revenue enhancements as of 2010: Consolidating City financial functions $100,000.00 Raising Real Property Transfer Tax to State average... $2,500,000.00 Establishing policy/procedure ensuring special revenue funds are self-sufficient ..$113,000.00 Reallocation of business registration staff ..$85,000.00 Amend City Charter to consolidate municipal elections for City Officers .$269,000.00 Implement an asset management program $100,000 Utilization study in Water Department fleet $109,000.00 Consolidation of City Police and Fire Dispatch Operations .$250,000.00 Implement light duty program for fire fighters ..$75,000.00 (savings estimated up to $700,000.00 annually over time) Instituting cost-recovering inspection of State Program ..$169,000.00 Adoption of Revenue Recovery for Recreation programs/services ...$19,000.00 Provide fiscal staff to finance or PW to assist development of CIP .$125,000.00 Authorize design-build contracting $1,000,000.00 Reduction of number of library branches ..$300,000.00

See SB 5909-5919; SB 6192-6227. ///


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The Citys refusal to resort to the political process to solve its financial problems is echoed by the Citys Budgetary Analysis and Recommendation for Budget Stabilization Report (Budget Stabilization Report). In the Budget Stabilization Report, interim City Manager Andrea TravisMiller (Travis-Miller) set forth a Revenue Option Summary that identified certain available revenue enhancements that were necessary to achieve financial sustainability: Utility User Tax 1% Increase..$3,000,000.00 annually Utility User Tax 2% Increase..$6,000,000.00 annually 911 Communication Fee.$6,700,000.00 annually Increase Real Property Transfer Tax...$3,000,000.00 annually Transient Occupancy Tax.......$250,000.00 annually Develop & Implement Marketing Plan for the Paramedic Subscription Program ....$690,000.00 annually Implement False Alarm Fees..$100,000.00 annually Sale of Surplus Land and Land Held for Resale $18,000,000.00

SB 149. Other strategies included improving the Citys cost allocation and charge-back process, increasing existing fees and fines to full recover costs, establishing new fees, organization restructuring and contract service reductions. In summarizing her suggested revenue enhancements, Travis-Miller stated, [T]he pursuit of new revenue sources and/or increasing existing revenues is a strategy that can no longer be ignored.11 SB 147. Establishing an aggressive cost recovery program typically does not require voter approval, and are actions that have been taken by many other California local government years ago. Decl. Martin 34. San Bernardinos failure to resort to the same measures is inexcusable. Finally, as set forth in Section (IV)(A)(1)(b), supra, the Citys Fiscal Emergency Operating Plan fails to address the availability of cash and an investment of $27 million as of June 30, 2012. Decl. Martin 31(a). Similarly, the Citys Selected Monthly Cash Flow Analysis (Attachment C to

Again, the City reported $9.1 million due from other governments as of June 30, 2010, which is not explained in its financial statements. Decl. Martin 31(e). This amount, which remains unaccounted for based on the City accounts payable/accounts receivable, would have drastically elevated the Citys liquidity crisis.
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the Fiscal Emergency Operating Plan) is limited to the General Fund, and does not discuss other City funds that may have a direct impact on City finances. Decl. Martin 31(a). Based on the available information, it is unclear if these funds were available for direct transfer or the loaning of cash balances to the primary government. Again, the City Charter allows for a transfer of up to 10% of Water Enterprise revenues, yet the City did not make such a transfer in FY 2010-11. Decl. Martin 24. It is also unclear if the City made a transfer from the Water Enterprise fund in FY 2011-12. Decl. Martin 24. By implementing more decisive budget reductions and utilizing available revenue enhancements, the City could have spared itself from insolvency. Even the current City Manager concedes that the City Council has ignored for some time viable revenue enhancing strategies. Resorting to Chapter 9 protections cannot be a substitution for the Citys own political process. See In re City of Bridgeport, 129 B.R. at 336. By failing to take advantage of revenue enhancement while continuously allowing expenditures to outpace revenues, the Citys petition serves to do just that. In sum, the City fails to satisfy the requirements of Section 109(c) because it has failed to exhaust reasonable and viable alternatives to the last resort of bankruptcy. B. The Petition Must Be Dismissed Because It Was Not Filed In Good Faith

Even if the City could establish that it satisfies the eligibility requirements of Section 109(c), which it cannot, the petition is nonetheless subject to dismissal because it was not filed in good faith. Pursuant to Section 921(c) of the Bankruptcy Code, the Court must dismiss the petition if it determines that the debtor filed its petition in bad faith. 11 U.S.C. 921(c); see In re County of Orange, 183 B.R. at 599 (Although the language of 921(c) is permissive, the case law indicates that 921(c) must be given a mandatory effect if the defect in the filing is in the debtors eligibility to file Chapter 9). In Chapter 9 cases, the debtor bears the burden of affirmatively demonstrating that it filed the petition in good faith by seeking a fair adjustment of its debts. In re Powers, 135 B.R. 980, 997 (Bankr. C.D. Cal. 1991); see 6 Collier on Bankruptcy P 900.02[2][d] (the seeking of a plan to fairly adjust debts is an element of the good-faith inquiry). A petition must be dismissed when its primary purpose is to cause delay as to deter and harass creditors in their bona fide efforts to enforce their rights. In re New York OTB, 427 B.R. at 279; see In re Sullivan, 165 B.R. at 80 (The primary
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function of the good faith requirement has always been to ensure the integrity of the reorganization process by limited access to its protections to those situations for which it was intended); see also In re Villages at Castle Rock, 145 B.R. 76, 81 (Bankr. D. Colo. 1990) (the good faith requirement is to prevent abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefitting them in any way or to achieve reprehensible purposes). Under the totality of the circumstances, the sole purpose of the Citys petition is to begin an allout war on public sector employees and retirees. The Citys Pre-Pendency seeks to unilaterally impose work force reductions, wage cuts, layoffs, non-merit based demotions, furlough days, contracting out for services, retirement buyout freezes, and the elimination of numerous positions.12 SB 7024-7056. While silent on the impairment of the debts owed to municipal bondholders, the PrePendency Plan almost exclusively targets public employees. Additionally, in unprecedented fashion, the City has failed to make more than $6 million in payments to CalPERS as of July 31, 2012. Jim Christie and Tim Reid, Bankrupt San Bernardino Halts Payment to CalPERS, October 19, 2012, THOMSONREUTERS.COM, available at http://newsandinsight.thomsonreuters.com/Legal/ News/2012/10_-_October/Bankrupt_San_Bernardino_halts_payments_to_Calpers/, and a copy of which is attached hereto as EXHIBIT 9. By refusing to negotiate or mediate with its union groups over debts and obligations owed to the public sector, and now failing to make scheduled payments to CalPERS, the City reveals its true intent. Evidentially, the City seeks to avoid and/or delay the payment of its obligations while effectively scapegoating workers and pension holders for its inability to implement sustainable financial practices. Such a singling out of one class of creditors for adverse treatment is the indicia of a bad-faith petition. See 6 Collier On Bankruptcy P 900.02[2][d]. The Citys end-run of AB 506, as set forth herein in Section (III)(A)(1), supra, also indicates that the Citys petition is only intended to delay payment obligations without benefitting creditors in

12

For instance, at a City Council meeting held on August 6, 2012, the City Council unilaterally suspended buyouts. Therefore, any employee who has filed for retirement as of the close on business of Monday, August 6, 2012, were to be paid their retirement buyout as scheduled. All other City employees who wish to retire after August 6, 2012 will not be entitled to buyouts. The unilateral suspension of buyouts without meeting and conferring is a matter subject to the meet and confer requirement of the Meyers-Milias-Brown Act, and violation of the Memorandum of Understanding existing between the City and the Mid-Managers Bargaining Unit.
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any way. In light of the continuous warnings of a potential crisis from City staff and Management Partners, the Citys claim that it was blind to its fiscal crisis is merely a ruse to flee into bankruptcy without engaging in a neutral evaluation of its debts. When paired with the widespread allegations of financial fraud perpetrated by City Officials, the Citys ability to carry its burden in proving that it filed the petition in good faith is tenuous. Compounding the confusion as to the reliability of the Citys financial reporting, the Citys most recent audited financials are for FY 2009-10, and the City has failed to complete a CAFR for FY 2010-11 or FY 2011-12. In light of these circumstances, the intent of the Citys petition should be heavily scrutinized. After all, despite evidence to the contrary, the City bases both the necessity for a declaration of a fiscal emergency, and its failure to negotiate and/or mediate with its creditors, on the premise that it did not learn of its fiscal condition until late July of 2012. Eligibility Brief at 32. The facts show that the Citys alleged late discovery is disingenuous. The City lacked the luxury of time to negotiate by its own design, and in an effort to delay and/or evade its creditors. This abuse of the reorganization process undermines the express purposes of Chapter 9, and should not be rewarded with the shield of bankruptcy. Finally, a municipal debtor must first seriously explore alternative avenues to bankruptcy. In re Pierce County Housing Authority, 414 B.R. 702, 714 (Bankr. W.D. Wash. 2009); In re New York OTB, 427 B.R. at 282. As set forth in Section (III)(A)(2), supra, the Citys pre-petition behavior shows little consideration for reasonable alternatives to bankruptcy. The City adopted a budget for FY 2011-12 that was destined to fail, yet it recklessly refused to strengthen cash reserves or improve revenue streams. Such a tactic is suggestive of a municipality seeking to run its finances into the ground for the purposes of evading or delaying its creditors. See In re Sullivan, 165 B.R. 60, 82 (the failure of a municipality to raise discretionary revenues demonstrates a lack of good faith, especially when the petition is filed to address the contractual rights of a specific creditor and is filed after years of financial mismanagement). In light of the foregoing, the Citys petition is designed with the purpose and intent of undermining the reorganization process at the expense of its current and former public employees. Therefore, this Court should deny the Citys petition in accordance with Section 921(c). ///
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IV.

CONCLUSION For the foregoing reasons, and subject to discovery, SBPEA respectfully requests that the Court

deny the Citys Chapter 9 petition in its entirety, and grant such other relief as the Court may deem proper. Alternatively, the City requests that this proceeding is stayed until the City engages its creditors in a neutral evaluation of its debts, in accordance with Cal. Govt. Code 53760.3.

DATED: October 24, 2012

HAYES & CUNNINGHAM, LLP

/s/ Christopher H. Conti By: DENNIS J. HAYES CHRISTOPHER H. CONTI Attorneys SAN BERNARDINO PUBLIC EMPLOYEES ASSOCIATION

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PROOF OF SERVICE OF DOCUMENT


I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: Hayes & Cunningham, LLP, 5925 Kearny Villa Road, Suite 201, San Diego, CA 92123 A true and correct copy of the foregoing document entitled SAN BERNARDINO PUBLIC EMPLOYEES ASSOCIATIONS OBJECTION TO DEBTOR CITY OF SAN BERNARDINOS PETITION AND STATEMENT OF QUALIFICATION UNDER TITLE 11 U.S.C. SECTION 109(c) will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On October 24, 2012, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below: Service information continued on attached page 2. SERVED BY UNITED STATES MAIL: On October 24, 2012, I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. DEBTOR City of San Bernardino, California City Hall 300 North D Street San Bernardino, CA 92418 Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on October 24, 2012, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. Via Overnight Delivery Honorable Meredith A. Jury United States Bankruptcy Court Central District of California 3420 Twelfth Street, Suite 325 / Courtroom 301 Riverside, CA 92501-3819 Service information continued on attached page I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct.

October 24, 2012


Date

Stephanie Kierig
Printed Name

/s/ Stephanie Kierig


Signature

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1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Jerrold Abeles Franklin C. Adams abeles.jerry@arentfox.com franklin.adams@bbklaw.com; Arthur.johnston@bbklaw.com; lisa.spencer@bbklaw.com; bknotices@bbklaw.com Joseph M. Adams jadams@lawjma.com Andrew K. Alper aalper@frandzel.com; efiling@frandzel.com; ekidder@frandzel.com Thomas V. Askounis taskounis@askounisdarcy.com Anthony Bisconti tbisconti@bmkattorneys.com Jeffrey E. Bjork jbjork@sidley.com Sarah C. Boone sboone@marshackhays.com; ecfmarshackhays@gmail.com J. Scott Bovitz bovitz@bovitz-spitzer.com Jeffrey W. Broker jbroker@brokerlaw.biz Deana M. Brown dbrown@milbank.com Michael J. Bujold Michael.J.Bujold@usdoj.gov Christopher H. Conti chc@sdlaborlaw.com; sak@sdlaborlaw.com Christina M. Craige ccraige@sidley.com Alex Darcy adarcy@askounisdarcy.com Susan S. Davis sdavis@coxcastle.com Robert H. Dewberry Robert.dewberry@dewlaw.net Todd J. Dressel dressel@chapman.com; lubecki@chapman.com Chrysta L. Elliott elliottc@ballardspahr.com; manthiek@ballardspahr.com Scott Ewing contact@omnimgt.com; sewing@omnimgt.com Paul R. Glassman pglassman@sycr.com David M. Goodrich dgoodrich@marshackhays.com Everett L. Green Everett.l.green@usdoj.gov Chad V. Haes chaes@marshackhays.com; ecfmarshackhays@gmail.com James A. Hayes jhayes@cwlawyers.com M. Jonathan Hayes jhayes@hayesbklaw.com; roksana@hayesbklaw.com; Carolyn@hayesbklaw.com; Elizabeth@hayesbklaw.com D. Edward Hays ehays@marshackhays.com; ecfmarshackhays@gmail.com Eric M. Heller eric.m.heller@irscounsel.treas.gov Bonnie M. Holcomb bonnie.holcomb@doj.ca.gov Whitman L. Holt wholt@ktbslaw.com Michelle C. Hribar mch@sdlaborlaw.com Steven J. Katzman SKatzman@bmkattorneys.com Jane Kespradit jane.kespradit@limruger.com; amy.lee@limruger.com Mette H. Kurth kurth.mette@arentfox.com Michael B. Lubic michael.lubic@klgates.com Richard A. Marshack rmarshack@marshackhays.com; lbergini@marshackhays.com; ecfmarshackhays@gmail.com Gregory A. Martin gmartin@winston.com David J. McCarty dmccarty@sheppardmullin.com; pibsen@sheppardmullin.com Reed M. Mercado rmercado@shheppardmullin.com Aron M. Oliner roliner@duanemorris.com Scott H. Olson solson@seyfarth.com Dean G. Rallis drallis@sulmeyerlaw.com Christopher O. Rivas crivas@reedsmith.com Kenneth N. Russak krussak@frandzel.com; efiling@frandzel.com; dmoore@frandzel.com Gregory M. Salvato gsalvato@salvatolawoffices.com; calendar@salvatolawoffices.com Mark C. Schnitzer mschnitzer@rhlaw.com; mschnitzer@verizon.net Benjamin Seigel bseigel@buchalter.com; IFS_filing@buchalter.com Diane S. Shaw diane.shaw@doj.ca.gov Jason D. Strabo jstrabo@mwe.com; losangelestrialdocket@mwe.com Matthew J. Troy matthew.troy@usdoj.gov United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov Anne A. Uyeda auyeda@bmkattorneys.com
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Annie Verdries Brian D. Wesley Kirsten A. Roe Worley

verdries@lbbslaw.com brian.wesley@doj.ca.gov kworley@wthf.com; bcordova@wthf.com

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012

F 9013-3.1.PROOF.SERVICE