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Desert Hot Springs Debates Police Versus Bankruptcy Path

By James Nash
June 18, 2014 8:04 AM EDT 181 Comments

A California city still burdened by debt payments from its 2001 bankruptcy is struggling to avoid defaulting on those bonds or going insolvent for a second time in 13 years.

A decade after Desert Hot Springs emerged from court protection, it’s again on the brink of fiscal collapse. Officials last night discussed dissolving the 27-employee police department and handing the service over to the surrounding county, the Desert Sun reported. The community of 28,000 in an arid valley east of Los Angeles is at risk of becoming the sixth U.S. city in the past 25 years to go bankrupt twice.

City council declared a fiscal emergency in November, a step toward bankruptcy under California law, after staff warned the municipality would run out of cash by March because of “severe economic downturns, state takeaways and a decline in development activity.” Desert Hot Springs also faces about $740,000 in annual debt payments on securities issued in 2004 to cover the cost of a legal settlement that pushed it into bankruptcy in 2001.

“There is a plan to get our city on a steady, even keel,” Mayor Pro Tem Russell Betts said of the proposal for the police department. “The real question is, is our city council and our community willing to do that?”

Spa City

Desert Hot Springs, which bills itself as “California’s spa city,” hasn’t shared in the recovery that’s boosted state revenue from taxes and fees to a record $107 billion this year. The tailwind that’s filling California coffers -- taxes on incomes of newly minted technology millionaires, international trade and a recovering housing market -- is mostly bypassing Desert Hot Springs and much of California’s interior.

The 51-year-old city about 110 miles (175 kilometers) from Los Angeles boasts 15 boutique spas fed by geothermally heated mineral water. It used to lure Hollywood royalty such as Marilyn Monroe and Cary Grant, according to the 2012 book “Celebrities in Hiding,” by local author Audrey Moe. The city fell out of favor after Palm Springs and other nearby communities built more modern and popular resorts.

Revenue Slide

This year, revenue sank to $6.6 million, from $9.5 million in 2012, according to budget documents, as tourism slowed, residents shopped elsewhere and development stagnated. Declines occurred across most major sources, including hotel bed taxes and charges for building permits. Among major revenue areas, only property levies increased.

At one point in April, Desert Hot Springs had $450 in the bank, Betts said.

The city reduced staffing by two-thirds during the past five years and cut salaries of most remaining employees by 22 percent, according to an analysis of a ballot measure to raise taxes on vacant parcels.

Voters on June 3 rejected the tax measure, which city officials said would have raised as much as $3.8 million a year. It received 61 percent support, short of the two-thirds needed to pass a tax increase under California’s Proposition 13.

Before city leaders consider disbanding the police department and bringing in sheriff’s deputies from Riverside County, they should consider raising franchise fees for electric, cable television, gas and waste-disposal utilities and eliminating inspectors looking for graffiti, illegal dumping and other code violations, Councilman Scott Matas said.

Community Knowledge

“With community policing, they know where the people live,” Matas said of Desert Hot Springs police. “They know how to provide services to the community.”

Wendell Phillips, a lawyer for the 22-member Desert Hot Springs Police Officers Association, said eliminating the local department would reduce law enforcement in the town.

“The residents know that,” Phillips said. “If that’s the road they’re going to go down, I don’t think the residents are going to be happy.”

Phillips suggested the city consider another tax measure devoted to public safety with the guarantee that the department not be dissolved.

Matas, who’s been on the council since 2007, said a second bankruptcy is unlikely.

Dissolution Road

“We’d just have to dissolve the city,” he said. California law allows cities to disincorporate though votes of the state legislature or the public, although no city has done so since 1973.

Desert Hot Springs had $20.4 million in long-term debt as of June 30, 2013, according to its annual financial disclosure. The largest portion, $9.7 million, was for bonds issued in 2004 to help satisfy an $11.5 million court judgment that drove the city to seek bankruptcy protection three years earlier.

The city’s travails run counter to the trend of improving fiscal conditions for states and localities five years after the recession. Nineteen issuers have defaulted on debt for the first time this year, down from 31 at the same point of 2013, according to research firm Municipal Market Advisors.

The sums involved with Desert Hot Springs also pale in comparison to Detroit, which filed a record $18 billion municipal bankruptcy last year.

Yield Demands

Desert Hot Springs certificates of participation issued in 2004 and maturing in March 2044 traded June 4 at an average yield of 6.58 percent, data compiled by Bloomberg show. This year, investors have demanded about 3.3 percentage points of extra yield on average to hold the tax-exempt debt instead of benchmark securities.

A developer sued the city in 1991 for denying permits for a low-income mobile-home park, and a jury levied a $3 million award against the city for violating the federal Fair Housing Act, according to a statement accompanying the 2004 bond sale. A federal court overturned the city’s appeal and ordered it to also pay attorney’s fees.

Desert Hot Springs exited bankruptcy protection in 2004 after issuing enough debt to cover costs associated with the bankruptcy and daily operations.

In a staff report last week, City Manager Martin Magana said city council must cut an additional $1.6 million to keep the city solvent. Eliminating the police department would save about $734,000 a year, Magana said. County sheriff’s deputies would patrol Desert Hot Springs’ 24 square miles.

If Desert Hot Springs does seek protection again, it would join Macks Creek, Missouri; Westminster, Texas; Prichard, Alabama; Moffett, Oklahoma; and Washington Park, Illinois, as cities that have filed for bankruptcy twice since 1988, according to the Washington-based nonprofit Tax Foundation.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

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