Bankruptcy: Report Warned of San Bernardino Fiscal Foolishness

Five years before San Bernardino became California’s third city seeking bankruptcy protection in 2012, a266-page management analysis report warned of dire repercussions if changes weren’t made that would cut costs and shore up the general fund.

But a 2010 follow-up review to those recommendations found that the city had only implemented 34 percent of the needed changes and was still stuck in an antiquated, costly way of doing business.

Now transformations will likely be forced upon the city as it grapples with a way to make payroll in two weeks into a $45 million budget shortfall. For the past several years, the council has been presented with false budget numbers showing more money than was actually available, while bills were being paid with restricted reserve funds.

“I have some ideas how we got to this point,” Councilman Rikke Van Johnson said at a meeting last week. “We found ourselves in similar position in 1991 and in 2009 when we made some drastic decisions and cuts. In 2005, our tax plateaued, so we were in [a recession] sooner than rest of nation.” Officially, the Great Recession began nationally in December 2007.

Regardless, those 2009 cuts didn’t go far enough to stave off the doom that city officials were warned about in the report issued by Management Partners Inc., a government cost effectiveness consulting firm.

“As noted previously, the City of San Bernardino fiscal reports and experiences reported by departments indicate that the City already has seen serious shortfalls and will continue to be unable to fund or sustain programs,” the report said. “Following are items which should solicit concern for the future fiscal condition of the city. In particular, the City lacks designated reserves for several significant liabilities and currently is not keeping track of all reasonably foreseeable future liabilities.”

The report also stated: “San Bernardino has less than one month operations funds in reserve…this is considerably lower than most cities.”

Bankruptcy strikes

The San Bernardino City Council voted last week to declare a fiscal emergency and file for bankruptcy on the heels of Stockton, which filed last month. Stockton has a shortfall of $26 million with a population of 300,000, compared to San Bernardino’s 210,000 people.

San Bernardino has the dubious distinction of the being the poorest city for its population size in the state, second in the nation only to Detroit.

But despite this, it had some dubious operating procedures that didn’t lend themselves to a city that was counting its pennies rather than engaging in a spending spree, the report found.

“When the Management Partners report came back, the council had a subcommittee to deal with it,” said former Councilman Tobin Brinker. “I asked to be on the committee, but instead they chose three other people. They opted to take the low-hanging fruit first that really needed to go. After several discussions with the council, I pushed to be more surgical and make deeper cuts. That didn’t happen.”

Brinker was ousted this year in what he says was a campaign by public safety unions to get another candidate in office who wouldn’t push for pension reform.

Report not deep enough

Councilmember Wendy McCammack, who has been in office since 2000, said she questioned whether the city could afford the $250,000 expenditure for the report, then was dismayed at the product because it didn’t go deep enough.

“I voted yes on [commissioning] it because I felt like there were a lot of inefficiencies in city government,” she said. “But unfortunately the things I asked them to look at they didn’t. They did a cursory review instead of an audit that I was looking for.”

Then the follow-up report cost another $25,000, with an additional $50,000 for a special workshop presentation.

“What I was looking for was, as an example on the law enforcement side: Are there three secretaries to every supervisor? One supervisor for four people?” McCammack said. “I thought the Fire Department and Police Department could cut costs with obvious fixes.”

The report was quietly languishing on the city’s website until news of the looming bankruptcy brought waves of public speakers to council meetings, including teacher Roxanne Williams.

“Here is a 2007 report by Management Partners, who predicted the demise and bankruptcy,” Williams said to the council, waving a printout of the report to the packed audience and instructing them on how to locate their own copy.

“I want to ask the City Council, Why have these recommendations not been implemented?” Williams said. “It’s time for leadership, not finger pointing.”

‘Fragile’ finances

The report stated something leaders knew even back then: “In general, the City’s overall financial position in the general government can be characterized as fragile.”

And: “The financial functions of the City are significantly fragmented.”

One of the recommendations was to consolidate three finance director positions into one. That was not done and McCammack explains why. “One was with the city, another was with the Economic Development Agency and a third was with the Water District,” she said. “The Water District is a separate fiscal entity and we could not do that. Removing them all and leaving us with the current person at the city who created all these errors was not a good choice.”

Said said other fixes were not possible with a popular vote because the city, under California law, is a charter city.

Still, no one could discount the fact that the report noted a “structural imbalance” in nine of the past 10 years.

The Government Financial Officers Association “recommends that governments have a formal policy about the level of undesignated reserves or fund balance, and that at a minimum the balance should be between 5 and 15 percent of regular general fund operating revenues,” the report said. “Most bond rating agencies want to see at least 10 percent. Another commonly used standard is three months of operating expenses, which is a 25 percent reserve…. During the last fiscal year, the City ended with a reserve of slightly over $10 million, approximately 7 percent, but this does not include significant unfunded liabilities.”

Other issues

Other issues the report noted:

  • A hiring process that is too cumbersome. Positions have to be justified to two different departments and with extensive paperwork by each. Vacancies are verified by both Human Resources and the city manager’s Office.
  • The city holds municipal elections in off years from the state’s general primary, which is more expensive because the city must pick up the entire tab. The cost for a consolidated election is $72,000 per race vs. $243,000 for one standalone race.
  • Janitorial services should be contracted out. The mean hourly wage for the private sector is $11.37 an hour vs. $20.11 for the public sector.  This would save $75,000 a year.
  • A two-year budget should be implemented.
  • Sworn officers spend an average of 40 to 50 percent of their time on taking reports on cold calls or responding to false alarms. A civilian force of retired officers could do this.
  • Upper-level police management is conducting officer training, when the duties could be assigned to civilian officers.
  • Animal control duties could be contracted to the county.
  • The property transfer tax should be raised to be in line with other similar cities. San Bernardino receives a fraction of other cities — 55 cents per $1,000.
  • City employees are lacking in training and automation is seriously outdated.

Former council member Brinker said that, ultimately, political infighting doomed the city and the expensive report they commissioned.

“It was very frustrating,” he said. “We were being presented with a stark future of the city’s financial future and in the springtime had a beautiful vision of the city of what we all wanted. We couldn’t come together. It was very, very clear. They laid it out for us: Bankruptcy is coming and you have to do something.”

(Tori Richards contributes to CalWatchdog.com. Originally posted on CalWatchdog.)