GARDENA, Calif. — The prospects are dim for the city with the slogan “Rich Heritage, Bright Future.”
A disastrous gamble in the insurance business has pushed the Los Angeles suburb of Gardena to the brink of financial collapse.
With a $26 million debt payment due next month, the city could join the shortlist of U.S. municipalities that have gone bankrupt.
“I don’t want to go bankrupt. I probably shouldn’t say that, but it’s certainly one of the things that’s an option,” City Manager Mitchell Lansdell said.
The creeping crisis in the working-class city of 60,000 is a cautionary tale of misplaced confidence, bad luck and risky decisions.
A dozen years ago, the City Council borrowed heavily to start the Municipal Mutual Insurance Co.
The municipal foray into the insurance business — unprecedented in California and perhaps anywhere else in the country — was supposed to do two things at once: cover the city against costly lawsuits and churn out a profit. In the end, Municipal Mutual did neither.
The debt payment due Dec. 15 is nearly as much as the tax revenue Gardena residents pay in a year.
If the city goes bankrupt, police will not stop patroling the streets, but layoffs and cuts in services could follow.
What’s more, the two banks involved in financing the insurance company and a soured home-buyers program would be entitled to seize property Gardena offered as collateral — gymnasiums, tennis courts, parks, the pool, the community center, a bus-repair yard. Even the police station and firehouses could be taken over, though that prospect is considered unlikely.
City officials are so desperate that they have discussed begging homeowners for more than $1,000 each.
Mr. Lansdell said the city is negotiating with the banks, which he identified as Japanese-owned Sumitomo Trust & Banking Co. and Union Bank of California. Sumitomo, which is owed more than $20 million, had no comment. Union Bank officials did not return calls for comment.
How did Gardena get into this mess?
Like many cities nationwide, Gardena struggled in the 1980s to keep up with ballooning liability insurance rates. As lawsuits became more common, a grandmother’s slip on a sidewalk or a car crash blamed on a misplaced street sign could leave a small city reeling.
The city used $10 million borrowed on the bond market to create Municipal Mutual. Under the plan, Municipal Mutual would turn a profit by enrolling other cities as policyholders, too.
“It appears that no other municipality has tried to do what Gardena did,” said Jim Hamilton, an insurance expert at the National League of Cities.
Gardena became the company’s inaugural customer in 1993. By the time the company got rolling, the market had changed. Big insurers again were writing new business, and many municipalities were entering nonprofit insurance pools.
The company struggled to find customers, and in 1995 it borrowed more than $20 million more on the bond market to refinance the original debt.
“We took one credit card and went, ‘Give us another credit card,’” Mr. Lansdell said.
Now the company is under state oversight, and is effectively out of business.
“It’s like being CEO of the Titanic,” said sole employee Dennis Evans.