Bankruptcy and fudged accounting in San Bernardino
San Bernardino, California made headlines this week for two distressing reasons. First, its city council voted to move toward declaring Chapter 9 municipal bankruptcy. Next, the city’s attorney made the shocking revelation that San Bernardino’s books have been cooked for 13 of the past 16 years, meaning that the surpluses the city had reported were, in fact, deficits.
San Bernardino is the third California city to move toward bankruptcy in the last few weeks, but the issue of bad accounting elevates this bankruptcy to a whole new level. The California Legislature enacted a new law last fall, AB 506, that requires 90 days of mediation between the city and creditors prior to a new municipal bankruptcy filing. But it is hard to see how that will be possible in San Bernardino’s case, since there are no legitimate financial filings to negotiate from. Moreover, the city doesn’t have the ability to pay its bills for 90 days during mediation. We’ve entered the twilight zone of muni workouts here.
Putting aside the issue of the city’s inability to follow proper accounting standards, San Bernardino may have a political leader in its mayor who is willing to take on the public unions and get necessary concessions from police officers, firefighters and other city employees. In the video above, Mayor Pat Morris discusses how the city will need to renegotiate salary and pension deals with city workers. Generally, salaries account for 70 to 80 percent of a local government’s cost structures and matter much more than debt service. Cities in California have the right to break wage and pension contracts with workers in bankruptcy. The problem is that we haven’t seen any political leaders willing to stand up to the unions.
The lawyers for public unions seem to be working hard to spin these bankruptcy stories as municipal development run amok. But the story in San Bernardino, like Stockton, is a case of enormous salaries paid to police officers and firefighters. In addition to the high wages paid to these workers, San Bernardino swelled the ranks of its public safety workforce relative to the population between 2004 and 2008. This trend is in reversal now, and finding a balance between public safety and fiscal sustainability will be tough. San Bernardino has a lot of work ahead of it.
City of San Bernardino: Budgetary Analysis and Recommendations for Budget Stabilization
Riski: Municipal bankruptcy
KPCC: A Q&A on the San Bernardino bankruptcy