Over the last decade and a half, San Bernardino ignored an economic hole by that resulted in municipal insolvency. On the heels of that revelation, the city council acted on Tuesday night to declare bankruptcy.
According to the acting City Manager Andrea Travis-Miller, the city faced a difficult but unavoidable decision. “Given the magnitude of the problem, we have no choice but to move very swiftly and restructuring is the alternative to get us where we need to be,” she said to the council.
The city’s financial troubles are substantial. The city has burdened itself with a deficit for the 2012-2013 fiscal year that equals 38 percent of its total general fund budget. To put that in perspective, if the city cancelled all of its municipal functions other than public safety, they would still be left with a deficit and have to cut public safety funding. And while the structural gap that existed in the city would have required further spending reductions, years of one-time budgetary gimmicks led the city past the brink.
To balance previous budgets, the city sold assets, borrowed internally, and depleted reserve accounts. Further complicating the budget picture was the inaccurate reporting of the city’s financial condition.
According to a report presented to the city council, city staff has misrepresented the general fund balance over the past few years. In 2009, the balance was underreported by $150,000. But by 2011, the variance had grown and the year-end cash-on-hand figure was over reported by more than $3 million. Staff said the General Fund would start with a $2.04 million surplus, when in fact the city started the fiscal year more than $1.1 million in debt.
“At this point the city does not have reserves to draw upon…” said Travis-Miller. “We are at a critical point.”
The bankruptcy in San Bernardino is of a different making that those seen in recent weeks in Stockton or Mammoth Lakes.
The resort-town of Mammoth Lakes declared bankruptcy after a $42 million legal settlement threatened their solvency. The town’s annual general fund budget is only $19 million.
Stockton borrowed and spent its way into bankruptcy. Years of ambitious development plans depleted city coffers and saddled the city with mortgages that it would be unable to pay. Meanwhile, the city offered generous pension benefits during boom years that it would later come to regret as its CalPERS contributions increased, threatening stability.
But at first appearances in San Bernardino, the city’s unwillingness to reconsider city services on an ongoing basis, instead opting for one-time “fixes” left a city that continued digging itself deeper into the hole. While many didn’t predict that the current economic recession would be so long, most cities in California didn’t gamble their futures on a quick recovery.
San Bernardino’s gamble left them with just $150,000 in the bank – or barely enough to cover their upcoming payroll.
Perhaps most surprised by the decision to declare bankruptcy were local employees, who had come to the table in recent years with concessions equal to about $10 million per year. They also suffered reductions in staff of nearly 20 percent. Despite those steps, expenses were never balanced with revenues.
The city engaged in years of deficit spending.
Now, deficits in out-year budget forecasts are unavoidable and unaffordable. If the city took no action, annual deficits are expected to surpass $45 million per year until at least 2016, when the total fund deficit in the city would reach more than $200 million.
Further complicating the financial picture in the city was the state elimination of redevelopment agencies and the redirection of vehicle license fees.
The city had used redevelopment agency funds to cover some of the costs of general government functions – or the cost of the city manager, finance, human resources, city clerk, city attorney, and other general municipal positions. Without the redevelopment agencies, the full cost of those positions had to be transferred to the general fund.
The loss of vehicle license fees cost the city about $1 million per year.
As seems to be the case with all municipal financial struggles, pensions and retirement benefits are being pointed at as one of the contributing factors. To cover previous pension obligations, the city issued pension obligation bonds, which currently cost the city about $3.5 million, a number that will nearly double over the next ten years. In 2006, the city spent 9 percent of its budget on retirement costs. By 2016, that number is forecasted to reach 15 percent .
By comparison, San Jose – where pension reform was linked to avoiding insolvency – spends about 20 percent of its general fund on pension related costs; Stockton anticipated paying as much as 19 percent towards their pensions.