Chowchilla teeters on edge of financial abyss

Chowchilla is struggling to survive.

Reeling from years of fiscal mismanagement and a crippling housing bust, the city has reduced its staff by more than one-third in the past 18 months, eliminated pay for City Council members and sold properties worth hundreds of thousands of dollars. But it may not be enough.

In what experts say was a highly unusual turn for the worse, the city in July defaulted on a $5.9 million bond that was used to build its new City Hall.

Things now are so bad that officials in Chowchilla, population 19,000, are discussing the possibility of disincorporating and turning over all services to Madera County. No California city has disincorporated in at least several decades.

The state controller's office, meanwhile, says it's monitoring the situation and has made several calls to city staff to see how it can help.

Chowchilla's finance chief, Wayne Padilla, said the city is running out of ideas for how to make cuts, though one possibility remains: Move everyone out of the $8 million City Hall -- a spacious and aesthetically pleasing building that opened in 2007 to much fanfare -- and into cramped quarters in the police department to save on energy costs. The City Hall building would go dark.

Even if the city did that, the 16,000-square-foot building still would be a major drain on the budget.

Chowchilla must make annual payments of $367,000 on the City Hall bond each year until 2035 -- an expense that consumes almost 10% of the city's general fund budget.

This year, the city used all of its bond reserve fund to make its payment -- a practice known in the financial world as a technical default.

If the city fails to make next year's payment, borrowing money could be much more difficult in the future. That would essentially stifle the city's ability to grow and make the city less attractive to developers.

Those now in charge of the city have, for the most part, inherited the mess. All five council members are relatively new, elected in 2006 or later.

Two of the city's longtime officials, City Administrator Nancy Red and finance chief Connie Wright, were replaced in 2009.

The new city leaders say it's their responsibility to save the town from its past mistakes.

"We're the phoenix rising -- we're not giving up," said Padilla, who has worked long hours sifting through the city's finances to figure out where things went wrong. "We think we're going to make it. We really do."

Meanwhile, residents have begun filling in the gaps. After the Parks Department was decimated by budget cuts last year, parents volunteered to run Little League and prepare baseball and soccer fields for their kids' games. Others agreed to mow parks and spray weeds on medians.

"This community is one that bands together to get through situations like this," said outgoing Council Member Justin White.

Chowchilla's problems became apparent last year after the City Council began examining how Red and Wright were running the city.

The council members placed Red on administrative leave in July 2009 when they learned she played a role in awarding a $63,000 government-funded loan to her husband's businesses -- in violation of state law. The state chose not to punish Red, the city administrator for more than a decade, because she resigned.

Wright, who had been in charge of the city's finances since 1980, also went on leave in July 2009 after the council discovered she made several critical accounting errors that led the city to overspend by more than $1 million.

For instance, she erroneously transferred $788,000 from a bond repayment fund for city infrastructure to the city's general fund in 2006. The money had to be sent back to the bond fund in 2009.

The revelations came at a time when the city was struggling with declining revenues caused by the housing bust and national recession.

Chowchilla was forced to make drastic cuts: It laid off 14 of its 82 employees and lost another 17 through attrition and by freezing vacancies. It furloughed remaining staff -- except police -- one day every two weeks. Police officers voluntarily gave up a scheduled raise. The city cut services, including a popular swimming program. It also sold four acres of property used by its Public Works Department, consolidated some services with the county, and contracted out or automated other services.

"There were some tears around the table," Mayor Jim Kopshever said of discussions about budget cuts with other council members. "It's tough in a small town -- you lay off four or five people and see their wives in the grocery store the next day."

The city went from having a $5.2 million general fund budget and a $1 million reserve in mid-2009 to a $4.1 million budget and a $500,000 deficit today.

Despite the cuts, the debt is projected to grow to $3 million by 2015 unless the city increases revenues and cuts more costs. Padilla said such debt could cripple the city.

The city is considering raising taxes, though some council members are reluctant to do so. It's also thinking about forgoing payments on the City Hall bond for the next few years.

Russell Fehr, Sacramento's city treasurer, said defaults on municipal bonds are extremely unusual and were uncommon, even during the Great Depression.

He said that if Chowchilla is unable to make its payments, it would make it difficult -- if not impossible -- for the city to convince a bank to lend it money for future projects, such as new buildings and infrastructure.

"Generally, situations like this are several years in the making and are the product of a series of bad or misguided decisions," Fehr said.

He added, however, that the city could recover after several years if the economy improves and banks decide to overlook Chowchilla's past errors.

The prospect of disincorporating, meanwhile, looms over the ongoing discussions about budget cuts and tax hikes. For many, it's a dreaded last resort.

"We want to believe it's a remote chance," Padilla said. "But if we're honest with ourselves, that's something we have to consider if all else fails."