The Los Angeles Times reported this morning that the City
(not County) of San Bernardino entered Chapter 9 Bankruptcy.
Unlike the previous bankruptcies, or attempted bankruptcies,
of Vallejo, Harrisburg, Central Falls, Montgomery County, Alabama, and
Stockton, San Berdo was a surprise, at least to those of us living outside the
Inland Empire.
The city is looking at a deficit of $45 million in a budget of
$130 million. San Bernardino, a city of 210,000, will run out of money in three
months to pay its 800 employees. It had cut its work force by 20% over the past
four years and employees had provided $10 million in concessions. These cuts though
were not enough to reverse the negative cash flow. It faces deficits for the
next five years.
The tax revenues, mostly from sales and property taxes,
dropped $16 million in each of the past two years. The financial reserves, “the
rainy day fund,” are exhausted. The State has also seized the redevelopment funds
of California’s municipalities.
High unemployment and the collapse of the housing market contribute to its fiscal woes.
Labor coasts are ¾ of the city’s general fund.
The usual suspects
for the bankruptcy are pension costs. Feckless civic leaders in San Bernardino,
as was common in cities and states, entered into overly generous contracts with
their unions, figuring future officials will have to pay the piper. The day of
reckoning is going viral across America.
The general public in California has soured on the public
employee unions, as witnessed by the votes in San Diego and San Jose to
radically restructure their public pensions. One rumor out of Sacramento is
that legislators controlled by the unions are looking for ways to nullify those
votes.
The public employee unions in California control the Democratic Party, and hence the legislature. California is not therefore going to adopt a Wisconsin or Michigan solution.
Stockton is a wakeup call for California and America. The
status quo is not viable.
Other candidates for municipal bankruptcies await. The one
that will implode the municipal bond market if it arises, as is rumored out
here, is the City of Angels, Los Angeles. The story is that the next mayor will
face financial problems so deep that the only recourse will be Chapter 9.
The
attraction of Chapter 9 for municipalities is that labor contracts, including pensions
and benefits, can be renegotiated.
New York City came perilously close to bankruptcy in 1975.
Congress bailed it out after the City reached agreements with its
constituencies, unions and creditors.
Republicans in Congress today will not support a federal bailout
of American cities, which are mostly Democratic cities. Perhaps a future
Congress will be more amenable, but only if substantial changes are made in
their labor agreements.
Unfortunately for the state of California, Chapter 9 does
not cover states.
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