Explaining Southern California's economy

A Q&A on the San Bernardino bankruptcy

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Steven Cuevas / KPCC

San Bernardino city council caps a 3-hour budget hearing by grimly approving authorization for Chapter 9 bankruptcy protection. What would bankruptcy mean for the city of more than 200,000?

Last night, the San Bernardino City Council voted to prepare for a bankruptcy filing. If the city of 211,000 does enter Chapter 9, it would follow Stockton and Mammoth Lakes, both of which have turned over their finances to the courts in recent weeks after a new state-mandated mediation process failed to resolve heavy debt burdens and, in Mammoth Lakes' case, a legal judgment that was more than double the city's budget. San Bernardino would also be the second U.S. city of more than 200,000 to enter bankruptcy.

So what would bankruptcy mean for San Bernardino? I've created a Q&A that I'll follow up with some more in-depth reporting on San Bernardino's specific problems.

Q: Can San Bernardino declare bankruptcy right away?

A: It's unclear. A new California law requires municipalities to declare a fiscal emergency — San Bernardino says that it can't make its city payroll, which definitely qualifies — and enter a mediation period before officially filing for Chapter 9. In Stockton's case, this consumed about 90 days but was ultimately unsuccessful. In a July 26 analysis of the city's dire finances, the mediation process was referenced.

Q: How did this happen?

A: San Bernardino is facing a budget deficit of more than $40 million. It has almost 16 percent unemployment (versus the state's 10.8 percent) and was clobbered by the financial crisis and the housing downturn. Since 2008, it's seen a drop-off in property-tax and sales-tax revenue of nearly $6.5 million, according to the city's March 26 analysis. On top of all that, it hasn't been able to keep up with its pension contributions and has issued more than $40 million in pension-obligations bonds to fund the shortfall, according to Bloomberg.

Q: What does this mean for San Bernardino residents?

A: Things have already gotten pretty bad. The city has laid off 20 percent of its workforce — 250 workers — and seen city employees take a 10-percent pay cut, according to published reports (that 10-percent cut expired at the end of June, reported the Inland Valley Daily Bulletin). The City Attorney last night brought up the payroll issue, which if true means that San Bernardino will have to come up with some way of funding itself to keep firefighters, cops, sanitation, and other essential workers on the job. Bankruptcy would enable the city to stop servicing its debts and use revenue instead to keep the city operating.

Q: How much will this cost San Bernardino?

A: Vallejo spent something like $10 million on its lengthy bankruptcy. So far, Stockton has spent around $3 million, and the hope is that its Chapter 9 will cost far less, since it's already been talking to its various creditors about terms. 

Q: How will San Bernardino get through this?

A: It will stop making payments on its debt and it won't be able to issue any new debt. It may also default on some existing debts, prior to declaring Chapter 9. But the good news is that there is no such thing as a city liquidating itself. San Bernardino would come out of bankruptcy will its debt reorganized and with a better chance to have a balanced budget and a reserve fund in the future. 

Q: What will San Bernardino look like when this is all over?

A: The city is talking about selling off assets and trying to shift safety services, such as firefighting, to a regional framework with several cities sharing costs. The city could discharge some, but not all, of its debts. Taxes would probably have to go up. And depending on how things go with CalPERS, current and future city workers would have to get used to contributing more to their pension plans. 

Q: What does this mean for retired San Bernardino city workers?

A: If San Bernardino does declare bankruptcy, they'll become creditors standing in line alongside San Bernardino's municipal bondholders. In terms of health care, they may not fare very well. Stockton's "bankruptcy budget," which it prepared when it declared Chapter 9, called for the complete elimination or retiree health benefits by next year. Pensions are another story. CalPERS, the California public workers pension system, considers pension obligations to be ironclad and in the case of the Vallejo bankruptcy in 2008, kept them intact through the three-and-half-year Chapter 9 proceeding.

Q: If San Bernardino goes bankrupt, will pensions be different when it comes out?

A: The Stockton bankruptcy will set the tone here. CalPERS may decided to hold a firm line again, in which case San Bernardino will find it difficult to reduce its pension obligations. However, the city did succeed in 2011 in getting new employees to pay their full share of CalPERS contributions — previously, the city had been picking up both the employee and employer contribution. It has expressed the desire to establish a similar deal with current employees.

UPDATE: "Airtalk" covered the San Bernardino situation in detail on this morning's show.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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