Just two years after San Bernardino left bankruptcy, one thing already seems clear: The “plan of adjustment” to cut the debt of the troubled city, which did not include pensions, is not working.
A new city budget approved last month had a deficit of $11.2 million that was closed with cuts, $5.8 millon from police. The growth in pensions and other costs outpaced the flat general fund revenue expected this fiscal year, $127.4 million.
“While the bankruptcy allowed the city to restructure and/or eliminate approximately $76 million in long-term obligations, it did not resolve the city’s structural annual operating deficit,” Teri Ledoux, acting city manager, said in a proposed budget in May.
The city had a $5 million deficit last fiscal year and is expected to have a $4.5 million deficit in the fiscal year beginning next July. New projections show the deficit growing to $20.6 million in 2027-28, well above the $2.8 million deficit expected then in the plan of adjustment.
“The city has faced yearly rounds of staffing reductions, employee concessions, and program reductions/eliminations,” Ledoux said.
Soaring pension costs are one reason the plan is not working. A city budget document said the plan did not expect a drop from 7.75 to 7 percent in the CalPERS investment earnings forecast used to discount debt, pushing up rates paid by employers.
With an emergency filing in August 2012, San Bernardino looked like the bankrupt city that might cut pensions. Vallejo considered cutting pensions after filing in May 2008, a council member said, but decided not to try after CalPERS warned of a lengthy and costly legal battle.
Before filing for bankruptcy in June 2012, Stockton went through a 90-day mediation, required by a union-backed state law after the Vallejo bankruptcy. But Stockton said from the outset pensions are necessary to be competitive in the job market, particularly for police.
San Bernardino was different because of startling mismanagement and deep economic decline. After a short time on the job in 2012, a new city manager and finance director found the city was on the brink of not being able to make payroll in August.
Critics said an outdated city charter, changed by voters in 2016 to a more conventional city council-city manager form, left no one accountable. Two former city officials made allegations of falsified budgets and possible illegal wrongdoing after the bankruptcy filing.
A recovery plan issued in 2015 said San Bernardino “evolved from a city that was the epitome of middle-class living into one of the poorest communities in the United States” with a median household income of $38,000.
A George Mason University case study of the bankruptcy said San Bernardino is the “poorest city of it size in the state,” with nearly a third of the 210,000 residents below the national poverty line.
Unlike the other two bankrupt cities, a desperate San Bernardino took the unprecedented step of skipping payments to CalPERS for a year. That gave CalPERS cause to terminate its contract with San Bernardino, presumably resulting in pension cuts.
But to protect pensions, CalPERS examined the city’s books, sued the city for payment, opposed its eligibility for bankruptcy, and even filed a brief backing a failed state attempt to withhold $15 million in city property and sales taxes to recover unspent housing money.
In the end San Bernardino agreed to repay CalPERS for $13.5 million in skipped payments, with interest and penalties bringing the total to $18 million. The city had a sketchy plan for a “fresh start” to “reamortize” pension debt, but never tried to cut pensions.
Sounding like Stockton, a San Bernardino disclosure statement in 2016 said that cutting pensions would “lead to an exodus of city employees” and produce a “noncompetitive compensation package” that would make recruitment of new employees difficult.
“This would be a particularly acute problem in law enforcement where retention and recruitment of police officers is already a serious issue in California, and where a defined benefit pension program is virtually a universal benefit,” said the San Bernardino statement.
Decade-long projections of pension costs are difficult because some factors are difficult to predict, notably the investment fund earnings that are expected to provide about 60 percent of the money needed to pay future pensions.
Pension costs in the San Bernardino plan of adjustment are based on a 20-year model. Recent 10-year models show the gap between the pension cost forecast in the plan and the new projections widening to $13 million in eight years.
The plan expects pension costs to increase to $35 million in fiscal 2027-28, said a progress report issued last month. The latest 10-year model expects costs to increase to $48 million in that year.
A major change made during bankruptcy annexed the city and its fire department into the county fire district in June 2016, adding a new tax of $148 on each parcel of land in the city.
All of the regular city property tax and 35 percent of the vehicle license fee in-lieu property tax (since reduced to 26.5 percent) were transferred to the county. The transfer amount can be renegotiated, if the revenue exceeds the county cost for city fire coverage.
In the long run, shifting the fire department to the county is expected to cut city costs. The firefighters began earning pensions in the San Bernardino County Employees Retirement Association after the shift.
About 384 San Bernardino firefighters remain in CalPERS as inactive members, said Amy Morgan, CalPERS spokeswoman. After retiring, they will receive pensions from CalPERS and SBCERA for the time served in each system.
The city no longer has to pay the “normal cost” of the inactive firefighters, the amount that covers the pension earned during a year, 22 percent of pay recently. But the city remains responsible for their pension debt or “unfunded liability.”
When the employer rate for the San Bernardino safety plan that includes police and the inactive firefighters jumped from 57.1 percent of pay to 82.6 percent the following year, some may have thought the shift to the county boosted costs.
But CalPERS said the new rate is only based on the police payroll, excluding the firefighters. “By dividing the required contribution by a much lower projected payroll it makes the ‘rate’ larger,” said CalPERS.
The increase in the annual contribution was proportionately much smaller than the rate increase, going from $21.5 million to $22.6 million. CalPERS projects that the rate for the San Bernardino safety plan will reach 104 percent of pay in fiscal 2024-25.
San Bernardino government remains turbulent. John Valdivia, who as a councilman survived a recall election in 2013, became mayor last November by defeating the incumbent, former Mayor Carey Davis.
The city council fired the city manager, Andrea Miller, on May 29 with no publicly stated cause amid conflicting reports of poor budget work and personal grudges. The new budget cut the pay of three elected officials, the city attorney, treasurer and clerk.
Their elected positions are eliminated under the new city charter next March, three months before the end of the fiscal year. The city plans to use $150,000 of the savings to hire lobbyists to pursue state and federal grants.
City Attorney Gary Saenz and City Clerk Gigi Hanna filed a lawsuit to stop the pay cuts. A superior court judge scheduled a hearing Aug. 12, the San Bernardino Sun newspaper reported.
The city hired a polling firm to survey residents about their attitude toward several different tax increases, including an extension or increase in a 1/4-cent sales tax scheduled to expire in March 2022.
As budget hearings began May 29 on closing the $11.2 million gap, Mayor Valdivia said city finances are still strong, an apparent reference to a $25 million reserve, but more revenue is needed.
“Let me be clear,” Valdivia said. “We are not going back into bankruptcy. We are not going back into bankruptcy.”
San Bernardino’s stubborn budget gap
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 15 Jul 2019