By Peter Henderson
SAN FRANCISCO (Reuters) - San Bernardino, California, which is planning to file for bankruptcy protection from creditors, would suspend payments on pension obligation bonds and other debt under a three-month proposal to be submitted to the city council on Tuesday.
A package of materials on the city council's website included the plan for July-September of this year.
City officials, including Interim City Manager Andrea Travis-Miller and Director of Finance Jason Simpson, recommend deferring $3.6 million in debt and lease payments, including on pension bonds and infrastructure bank loans.
"The council is being asked to authorize city staff to defer payment on the city's debt coming due between July 1, 2012 and September 30, 2012," the text of the proposal said.
The city council will also consider other emergency measures, such as a "freeze" of non-essential vacant positions, spending cuts organization-wide, suspending all equipment purchases and deferring any new Capital Improvement Program projects.
The city of about 210,000 people located 65 miles east of Los Angeles would become California's third city to seek protection from creditors since late June, after Stockton and Mammoth Lakes. But the speed with which its situation has deteriorated has shocked local residents and observers.
In the past few weeks, the city has declared a fiscal emergency and begun preparing for a bankruptcy filing, revealing a $45.8 million shortfall for the budget year that began this month.
The timing of the proposal to suspend debt payments surprised some traders on the $3.7 trillion municipal bond market.
"Frankly in the past, bondholders were not subjected to losses," said Kurt van Kuller, managing director at the Division for the Americas of Bank of Tokyo-Mitsubishi. "They maybe have more willingness to default at an earlier stage."
On Tuesday, there were no major trades of tax-exempt San Bernardino bonds on the market. Tax-exempt California GO debt was well supported by both dealers and customers on Tuesday. The 10-year spread over triple-A bonds closed on Monday at 74 basis points, well below the yearly average of 81 basis points.
(Reporting by Peter Henderson and Jim Christie; Editing by Chizu Nomiyama, James Dalgleish, Gary Crosse)
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