It’s beginning to look like a trend. San Bernardino has become the latest California city to file bankruptcy, joining the growing number of cities in the state that have become overwhelmed by financial woes. Other cities that have recently filed include Stockton and Mammoth Lakes. Although experts don’t predict an epidemic of bankruptcies, cities all over California are feeling the pinch of tighter budgets and reduced revenues.
According to Michael Coleman of the California League of Cities, some cities may work their financial problems out on their own. Others, however, will likely file for bankruptcy in an attempt to survive. Other municipalities may just quietly cease to exist, much like the hundreds of thousands of tiny towns that faded away in the early 20th century after the arrival of the automobile changed the way people live.
Although Mammoth Lakes was forced to file because of a multi-million dollar lawsuit, the small resort town was the exception to the rule. Vallejo, the city that began the current trend when it filed in 2008, could no longer afford to pay for its public safety programs. Stockton, which filed in June of 2012, attempted to negotiate with its creditors and the unions that represented its employees before finally filing in desperation. Similarly, San Bernardino announced its intent to file for bankruptcy protection when it became clear the city would not be able to make its July payroll.
There was a time when it was almost unthinkable for a municipality to file for bankruptcy. In recent years, however, tax revenues have dwindled as residents have lost jobs and homes to the recession. At the same time, labor costs, pension expenses and money spent in desperate attempts to boost their cities’ declining economies have taken an ever-increasing toll on city budgets. Pension costs, in particular, are considered a major culprit, having increased exponentially over the past five years.
When cities try to downsize, however, they face a number of hurdles. Unions fight to protect the pensions and salaries of their members, and residents are quick to vote against politicians who cut their safety services or don’t seem to be doing enough to attract visitors or new jobs to the area. Urban blight becomes a real risk, as those who can afford to move do so, leaving only those who are too poor to leave, a segment of the population that pays little in municipal taxes.
San Bernardino’s decision to file for bankruptcy was only the beginning of a long, hard period for the city. Next, it must come up with a plan to solve its financial woes. The city will almost certainly begin by re-examining its public safety services, which make up almost three-quarters of its annual general fund expenditures. Eliminating these services altogether is a very real possibility. The city would then have to come up with an alternative plan for protecting its citizens, such as contracting with regional agencies or privatizing the services.
Not everyone agrees that employee salaries and benefits are to blame for the current crisis. A spokesman for the union that represents San Bernardino’s firefighters says that city officials have wasted money on unnecessary civic projects even as city employees agreed to give up $10 million dollars’ worth of compensation.
Although San Bernardino’s city council may have seen bankruptcy as its salvation, the mayor of Vallejo says it didn’t turn out that way for his city. In addition to spending $10 million in legal expenses, Osby Davis thinks his city ended up agreeing to less favorable employees contracts than they could have negotiated if they had kept trying on their own. Currently, Vallejo’s public services have been halved and its infrastructure is being neglected. To add insult to injury, Vallejo suffers from the bad publicity related to the bankruptcy proceedings and has to struggle to overcome its new image as a bankrupt city. Davis advises cities that are thinking of filing for bankruptcy to reconsider.
In the meantime, San Bernardino is preoccupied with figuring out how to pay for services until the bankruptcy petition is officially filed. A new California law allows cities to declare fiscal emergencies, which will eliminate the expensive and painful negotiations Vallejo went through. However, such details may be among the least of the worries city officials face.
A far more serious problem for San Bernardino’s officials may be explaining how the city ended up with only $150,000 in its coffers and why there were no warnings the situation was so dire. According to Interim City Manager Andrea Miller, the belief that San Bernardino’s budget was balanced for the last two years was based on an error. City Attorney James Penman is less generous. He claims that the city’s budget figures for the last decade and a half were faked. Sorting out the mess may take years and is only expected to prolong the agony for city officials, employees, creditors and, unfortunately, residents.