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Two California cities' finances hinge on ballot questions

By Jim Christie

SAN FRANCISCO (Reuters) - Fresno and Hercules residents will vote June 4 on ballot measures that indicate how far some of California's ailing municipalities must go to fix their wobbly finances.

In Fresno, a city of 500,000 in the state's Central Valley, Mayor Ashley Swearengin is seeking support for a measure to privatize residential garbage collection. The plan would save money by eliminating about 120 city jobs and raise at least $14 million in fees over several years from a private garbage contractor.

On the same day, Hercules, a city of 24,000 in the San Francisco Bay area, will vote for the second time in two years on a tax increase, this time a rise in utility service charges. If the measure fails, the city says, it may have to shut down the police department and contract with the county sheriff for law enforcement.

The $3.7 trillion municipal debt market was shocked last year when three California municipalities - Stockton, San Bernardino and Mammoth Lakes - filed for bankruptcy in quick succession.

Mammoth Lakes quickly withdrew its bankruptcy filing, and a stronger economy is putting more money in government coffers around the state. But the much larger Stockton and San Bernardino cases may yet impose substantial losses on bondholders, and many other local governments remain close to the fiscal brink.

As times improve, "the struggle isn't quite as bad, but it's still a struggle," said Marilyn Cohen, president of Envision Capital Management in Los Angeles.

Fresno, the largest city in the state's agriculture-rich Central Valley, was hit hard by the housing slump and recession, and its economy remains weak, Moody's Investors Service said in January. Moody's cut the ratings on most of the city's lease revenue bonds to Ba1, one notch below investment grade.

Moody's also downgraded Fresno's convention center and pension and judgment obligation bonds to Ba2, another notch deeper into so-called junk territory, and said its outlook on all of the ratings was negative. The downgrades affect about $318 million in debt. Fresno has no general obligation bonds.

California's recovery is beginning to lift the Central Valley, but not nearly as much as it has helped coastal area cities such as San Francisco and Los Angeles, said Jeff Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton.

TAKING OUT THE GARBAGE

Fresno City Manager Mark Scott said that outsourcing garbage collection, which the city employee unions fiercely oppose, is a key step in restoring solvency. California's fifth-largest city faces a projected $1.2 million deficit in its $243 million general fund budget for the next fiscal year.

Savings on garbage collection and the fees from the company that would take over the service could be used to pay back $20 million borrowed from various city funds, Scott said.

The unions will be pressed to help the city's finances even if voters approve the measure, Scott said. "We're asking all 11 to take cuts as their contracts come up."

In Hercules, near San Francisco, alarm bells rang early last year after its now-defunct redevelopment agency defaulted on a bond payment of about $4 million.

The debt's insurer, Ambac Assurance Corp, sued Hercules, which assumed oversight of the agency's operations. In a settlement, Ambac received two city properties as collateral, staving off a possible bankruptcy filing.

But Hercules' finances remain strained. The city balanced its current budget by tapping reserves and using one-time money, and its leaders are urging voters to approve a measure to increase its utility users tax by 2 percentage points to 8 percent. That would raise about $1 million a year over five years.

Hercules voters last June approved a four-year, half-cent sales tax increase to support the city's general fund. They also voted for a plan to sell the municipal electric company, which the general fund has propped up.

The city police department is already down to 21 officers from 30 two years ago, said City Manager Steve Duran. If the current measure fails, it may let the remaining officers go and instead pay the county to patrol the streets.

"The only place where we have any meat left on the bone, if you will, is the police department," he said.

(Reporting by Jim Christie; Editing by Lisa Von Ahn; Editing by Jonathan Weber, Mary Milliken and Lisa Von Ahn)

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