Is Bankruptcy the ‘New Normal’ for California Cities?

Have you heard the term “new normal?” It’s often used to describe a future situation that is bleaker than the past. After this recession, the United States will likely be left with a “new economy.” So people are wondering if municipal bankruptcy is going to become a “new normal.”

Undoubtedly, the foreseeable future for local governments will vary drastically from the local government so many knew in the 2000s. There will be growing – and shrinking – pains as these agencies and municipalities discover their “new normal.” However, bankruptcy is the last, worst option for anyone and it is unlikely that it will ever be considered normal.

That being said, I think it’s important to note that while the cases of cities teetering on the brink of insolvency get the most attention, they are the exceptions. Three cities have declared bankruptcy – out of 482. That’s far from common.

If someone generalizes these three cities as indicative of all local government in California, we can generalize the general narrative that has played out over the last four years.

San Bernardino represents the cities that have not been governed well. Here, the danger of a stopgap approach to weathering finances during a prolonged recession is clearly demonstrated.

The hope was the recession would be short and recovery would come quick and strong. But nearly four years after the recession began, their unemployment rate remains double the national average, their foreclosure rate remains triple the national average, and their city’s revenues remain lower than they were in the boom years.

Gimmicks, borrowing, and one-time measures helped the city stay afloat during the first few years of the recession, however, it ultimately left the city with an insurmountable deficit, which left the city with pennies in the bank and millions in debt.

To make matters worse, they left the most difficult decisions until they had no other choice other than to turn their problems over to bankruptcy lawyers.

Had they faced their problems sooner, they could have written themselves a different reality. It would have still included drastic cuts, reorganization, and a “new normal,” but they could have preserved their credit rating and their access to the bond market.

Contributing to San Bernardino’s bankruptcy is a variety of factors, among which are pensions. Pensions are often unfairly objectified as the culprit of all municipal financial woes. However, they are indicative of how cities are saddled with the burdens of decisions made years before, and how sometimes cities lack complete financial control.

The squeeze of pensions isn’t over yet. CalPERS’ policy of ‘smoothing’ helps avoid spikes in municipal contributions to the pension system. They spread painful increases in contribution rates over several years. San Bernardino is still in the climbing side of the smoothing curve.

It will take multiple years of strong gains by CalPERS before contributions may be reduced. That means there will be years of more obligated spending.

Other cities have taken a different approach.

In a world away from San Bernardino sits the Sacramento suburb of Rocklin. The modest-sized city has taken a series of proactive steps through the years of recession to not only address how much money they spend, but how they spend it.

Rocklin’s new city manager, Ricky Horst, summarized their approach to finances in this year’s budget message.

“Needed is the flexibility to continue to provide quality services upon which we all have come to depend,” he wrote. “It’s not a matter of chance; it’s a matter of choice!”

While the city dipped into some of its special fund reserves for one-time fixes, it took other measure to ensure they were one-time measures. Now, they are not only protecting their general fund reserve at about 25 percent of their annual operating budget, they are rebuilding the accounts they used in previous years.

Rocklin represents the cities that are unlikely to broach the bankruptcy conversation. And it isn’t alone. Other cities have positioned themselves well, we just don’t hear about the successes of balanced budgets or rebuilding reserves.
Cities, counties, and special districts in this state are not preparing to declare bankruptcy en masse. However, cities that continue to follow the San Bernardino Model instead of subscribing to a Rocklin Model will continue to flirt with insolvency.

Further prudent governance, and the non-interference of the State, is imperative to surviving into a “new normal.”