© Kirk McKoy / Los Angeles TimesRoxanne Williams asks the San Bernardino City Council, which on Wednesday declared a fiscal emergency and voted to file for bankruptcy, to do what it can to save the city. The Inland Empire city faces a $45.8-million budget shortfall.
US, California - The San Bernardino City Council on Wednesday declared a fiscal emergency, an acknowledgment that the city is nearly broke and a legal maneuver that will allow leaders to file for bankruptcy protection without going through months of state-mandated mediation.
The action comes a week after the council voted 4 to 2 to seek Chapter 9 bankruptcy protection, prompted by warnings from interim City Manager Andrea Travis-Miller that the city faced a $45.8-million budget shortfall and might not have enough money to make the August payroll.
San Bernardino becomes the third California city to declare insolvency in the past month, joining the Central Valley city of Stockton and Mammoth Lakes, in the eastern Sierra Nevada. Compton in L.A. County also appears to be on the brink of financial collapse, according to city officials.
"The proposed action has torn the city apart, turned friends into enemies,'' said San Bernardino Councilwoman Wendy J. McCammack. "The action that's taken tonight will affect everyone ... but the city will survive.''
Along with declaring a fiscal emergency, the council voted to file for Chapter 9 bankruptcy protection, both approved by a 5-2 margin. The council next week will begin the difficult process of crafting a survival budget, until its attorneys can file with the federal Bankruptcy Court.
Mayor Patrick Morris called the decision the "most difficult one we've ever had to make," but said city leaders had little choice. The city faces a $5-million budget shortfall in July, and has a $3.4-million payment due on a pension obligation bond later this month. The city's line of credit has been rescinded, and it has been stiffed by the short-term credit market, Morris said.
San Bernardino's decision to declare a fiscal emergency may trigger an "emergency exit" clause that would allow the city to skirt provisions in a new state law that requires lengthy mediation with labor unions and creditors. That process failed in Stockton, which filed for bankruptcy protection last month.
San Bernardino would be the first city to take advantage of the loophole. To do so, city leaders must assert that the city's financial situation "jeopardizes the health, safety, or well-being" of residents and that it will be unable to meet its obligations within the next 60 days.
The city of about 210,000 residents, about 60 miles east of Los Angeles, has a convincing case.
Earlier this month, San Bernardino had just $150,000 in its bank accounts, according to city officials. A city Finance Department report shows the city's reserve funds are tapped out. Sacramento's decision to scrap local redevelopment funding also cut off about $6 million a year that went to the city's economic development agency, money used to help pay salaries of some administrators as well as for code enforcement and street work in redevelopment zones, according to the report.
San Bernardino's $45.8-million budget deficit amounted to close to one-third of the city's annual general fund budget, and was only expected to grow in the years ahead. Even if the city eliminated every agency except police and fire, which account for nearly 75% of the general fund budget, it still would not be enough, Travis-Miller told the council.
The city's finances have been spiraling downward for years, accelerated by plummeting tax revenues in the recession-flattened Inland Empire and rising employee pension and salary costs, officials said.
Nearly one in four city employees earned $100,000 or more in 2010, the vast majority police officers or firefighters, according to the state controller's office.
"I don't think the people knew how much goes to police and fire," David Maynus, who has worked for the city's sanitation department for 24 years, said before the council meeting. "Now they realize we're going bankrupt, and something's not right."
The city's pension costs are expected to eat up 15% of the city's budget by 2015, city financial records show.
To save costs, city finance officials and outside consultants urged the city to consider contracting with outside agencies for police and fire protection.
Accusations of financial malfeasance also have surfaced, including allegations of bid rigging on city contracts. City Atty. James Penman last week alleged that city financial reports had been falsified for years but later said he was unsure if there had been intentional wrongdoing.
The San Bernardino County Sheriff's Department has confirmed that a criminal investigation is underway, although the focus of the inquiry remains unclear.
An analysis of the city's finances released last week stated that the city's general fund balance had been "erroneously stated for the past two fiscal years." The budget prepared for the council by city staffers showed a $2-million surplus on July 1, and a subsequent audit found that the city had a $1.2-million deficit.
An annual audit of San Bernardino's finances in 2010 found that the city redevelopment agency had improperly billed the U.S. Department of Housing and Urban Development, requesting reimbursements for expenses the city had yet to pay. The city "deliberately" did so because of "cash flow concerns," the audit found. City officials promised to end the practice.
Finance director Jason Simpson told the council Monday that city officials had been borrowing from restricted funds to pay general fund expenses for years, a practice not reflected in the city's budget documents or audited financial statements.
The consequences of San Bernardino's brush with insolvency have been felt immediately, with creditors canceling city-issued credit cards, forcing agencies to pay cash for essentials such as gasoline and coffee supplies. Dozens of employees have filed for retirement, putting the city on the hook to pay off their unused vacation and sick time.
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