Debt Trouble Puts Gardena on Watch List

The South Bay suburb of Gardena moved a step closer to possible bankruptcy Tuesday as a Wall Street credit agency put the city on a watch list because it can’t pay a $26-million debt due Dec. 15.

Standard & Poor’s put Gardena on the watch list after determining that the city had only about $3 million in reserves -- a fraction of what would be needed to cover the loan.

The city has hired a law firm that specializes in municipal bankruptcy to plot its next move. But the action by Standard & Poor’s places the city in an even more financially precarious position. Being on a watch list makes it much harder to borrow money -- something the city might need to do.

“That’s a big blow,” Councilman Oscar Medrano said. “It’s hard to build the city up if you can’t get a loan to do what you need.... We definitely don’t have $26 million in assets to pay the banks.”

City officials have been grappling for months with how to pay the loans that Gardena took out over the last decade to cover the costs of two financially troubled municipal programs.

Medrano and other officials argue that the city’s debt must be forgiven or significantly restructured. Otherwise, they say, bankruptcy is a distinct possibility.

City Manager Mitchell Lansdell said that he could not rule out bankruptcy, but that he was trying to do everything possible to avoid insolvency.

“I’m certainly not going on a path to lead us” to bankruptcy, Lansdell said. “But we do have to deal with the fact that our debt is potentially due and payable right now, unless we reach an agreement with the bank.”

The main cause of the city’s dour financial outlook was an unusual gamble taken 12 years ago when the city borrowed heavily to create an insurance company. The Municipal Mutual Insurance Co. was created in 1993 with $14.9 million borrowed by selling bonds. The idea was to generate income for the city while covering it against costly lawsuits.

Gardena became the first city in the country to own its own insurance company. The city hoped that the business would attract other municipalities as policyholders and make a profit.

“The plan was for the company to turn a profit, pay dividends back to the city so it could pay off the bond, then create a revenue stream for the city of Gardena,” said Lansdell, who, like the current council, was not in power then. Instead, the Municipal Mutual Insurance Co. flopped -- now reduced to a single employee -- and then drained the city’s finances. In 1995, Gardena borrowed more than $20 million in the bond market to refinance the original debt.

An insurance expert said he was puzzled by the city’s decision to create such a company.

“They thought they could make money out of this, but I don’t know what they were thinking,” said Jim Hamilton of the National League of Cities. “The word that comes to mind is reckless.”

The decision was made when many municipalities were part of municipal insurance pools and had little incentive to become policyholders in such a business, he said.

In addition to the insurance losses, the city owes more than $6 million because of a program, which failed in 1993, for first-time homeowners. In that program, 33 of 71 loans defaulted.

Some council members criticized city staff members for taking so long to tackle the debt problem.

“Why did we wait until the 11th hour to really and earnestly address this issue? We knew this debt was going to become due years ago,” Councilman Steven Bradford said.

“I think a lot of folks like to stick their head in the sand and hope the problem is going to go away,” he said.

But Lansdell denied that his staff had been slow to react.

“This is not an issue that I’m able to get away from at night,” Lansdell said. “I live with this issue every day.”

Officials had hoped to generate income by creating a redevelopment agency, which would have allowed the city to use tax revenues to spur commercial developments.

But voters earlier this month overwhelmingly rejected a proposal to create such an agency.

Lansdell and others stressed that the city’s finances had been improving in recent years, which Standard & Poor’s acknowledged in its report.

The city was running deficits of up to $8 million in the late 1990s. But in recent years, Gardena had recorded surpluses of up to $3 million, Standard & Poor’s said.

Since 1998, the city has laid off only one worker, officials said, though that could change.

“We still have a city to run, we still have to provide quality service to the community,” Lansdell said. “Yeah, we have to deal with this, but I’ve been dealing with this a long time. We’re not going to say we’re going to do X, Y and Z until we have a full game plan.”