Wednesday, July 11, 2012

Et Tu, San Berdo?

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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