On Tuesday, July 11, the San Bernardino city council voted four-to-two (with one abstaining) to file for Chapter 9 bankruptcy protection. A financial emergency declaration was anticipated for Monday, July 16, at which time the council will either enter mediation with creditors or file bankruptcy without delay.
When San Bernardino, California, files Chapter 9, it will take its historical place as the second largest municipal bankruptcy in the country. The city of Stockton’s June 28 bankruptcy still holds first place as the nation’s largest. At the other end of the spectrum, the tiny High Sierra resort city of Mammoth Lakes (population 7,700) just filed for bankruptcy on July 3 after being burdened primarily with a $43 million breach of contract judgment won by a developer. How many of California’s cities are trending toward financial implosion?
The Experts Weigh In
Joe Nation, professor of the Practice of Public Policy at Stanford University, warns that unless cities get more substantial concessions from workers and retirees, more municipal bankruptcies are inevitable. “I think this is the tip of the iceberg in terms of the problem…Stockton was spending $12 or $13 million on pensions 10 years ago. By 2010, it was $30 million… and will double again over the next five years, unless something is changed.”
The California League of Cities’ fiscal policy advisor, Michael Coleman, noted that some struggling municipalities may still resolve their financial problems and continue operations. “Some cities may not go into a bankruptcy, but they may dissolve. They may cease to exist.”
Governor Jerry Brown summed up the news pragmatically with this statement: “Cities may not have the money they need, and they have to take whatever reasonable steps they can under the law.” That instills little confidence to the San Bernardino residents who live with 16% unemployment and a foreclosure rate thrice the national average.
Bankrupt San Bernardino
Located about 65 miles east of Los Angeles and north of Moreno Valley, the city of San Bernardinois the 17th largest city in the state and serves as the county seat of San Bernardino County. The city enjoyed explosive growth during the housing boom and, you guessed it, is now suffering from the housing bust and plummeted property values. Mayor Patrick J. Morris explained that “[w]e have a host of our residents who are not working, not paying taxes, don’t have disposable income so they are not shopping. That’s a problem for us.”
After the surprising decision from the council, City Attorney James F. Penman stated that his “city needs breathing room and the bottom line is we cannot default on payments to our employees without violating the law.” And that is just what San Bernardino is facing. Despite its efforts to sell off city assets and bargain with employees, the city is quickly running out of cash. The municipality has money to pay wages for one more month, and that’s it – default is imminent. Bankruptcy will allow the city to renegotiate its labor agreements with current employees and retirees.
Despite a four-year 20% worker reduction and $10 million in employee concessions, the once proud city is experiencing a $45.8 million budget deficiency. With a population of 209,924 (2010 U.S. Census), the city’s core problem is the expense of city pensions, insufficient sales tax and property tax revenue, and a dearth of state aid. Mediation is unlikely to correct the financial abyss that this city faces. With $120 million in revenue anticipated for 2012, the city is obligated to pay $126 million to employees and retirees. That would be a $6 million shortfall before any city services are actually provided to residents and businesses.
Criminal Investigation Over False Surplus Reports
In a stunning exposé at city hall, the council and residents learned of financial mismanagement. Certain officials had falsified budget reports to show surplus when, in fact, the city had a growing deficit. The false reporting occurred for 13 of the past 16 years. (The mayor’s chief of staff, Jim Morris, referred to the reporting errors as mere inaccuracies, not deliberate misrepresentations.) According to the city attorney, the financial mismanagement is now under investigation for possible criminal activity by “appropriate government agencies.”