San Bernardino’s city council took the second step toward municipal bankruptcy. The council voted on Wednesday, July 18, declaring the city’s finances to be in a state of fiscal emergency. This follows the council’s previous vote on Tuesday, July 11, to file for Chapter 9 municipal restructuring.
Slipping Through the Loophole in California’s AB 506
By declaring a fiscal emergency, the city council took advantage of a narrow exception, a loophole, in California’s AB 506 legislation. That would be the same CA AB 506 that kept Stockton in mediation for 90 days with no comprehensive agreements sufficient to close that city’s budget gap – bankruptcy followed anyway. The mandatory mediation period under CA AB 506 is 60 days, but it may be extended for another 30 days which is what occurred with Stockton.
The City Council of San Bernardino doesn’t need further delays; it needs bankruptcy relief now. In the absence of federal bankruptcy protection, the city will be unable to pay its obligations in the next 60 days – that is a bona fide fiscal emergency because the city’s financial crisis “jeopardizes the health, safety, or well-being” of its residents. Knowing that it lacked the money to make payroll, the emergency declaration allows the city to bypass any mediation under CA AB 506 and go directly into bankruptcy. The municipality will operate under a very tight interim budget until the Chapter 9 petition is filed in federal bankruptcy court.
How Deep in Debt Is San Bernardino?
The financial situation plaguing San Bernardino is daunting. The city has a $45.8 million budget deficit. There are no reserve funds left. In 2010 about 25% of city workers earned $100,000 or more, mostly police and fire. By 2015 pensions to retired city workers will consume 15% of the city’s budget. With only $150,000 available in the bank earlier this month, the Inland Empire town is teetering on the precipice. Chapter 9 throws the city a lifeline and offers real hope for a fiscally sane future.
City Attorney James F. Penman indicated the bankruptcy filing will quickly follow the council’s emergency declaration: “I think it’s going to be a race to get it done by the August 15 payroll.”
Criminal Investigation Ongoing
There is an ongoing criminal investigation into possible intentional false financial reporting and bid rigging. The July 1, 2012, budget report presented a $2 million surplus when, following an audit, the city had a $1.2 million deficit. In 2010, the city deliberately billed the U.S. Dept. of Housing and Urban Development (HUD) for reimbursement. The city reported to HUD that San Bernardino spent redevelopment funds when it had not. The reason? The 2010 audit indicated that city officials were struggling with “cash flow concerns.” The city’s practice for years has also been to borrow from restricted funds to cover general fund expenses.