(November 30)   The city of San Bernardino intends to carry on with normal though reduced services over the next few years while running a $40 million annual deficit, according to a document approved by the city council this week for filing with the Federal Bankruptcy Court in Riverside.
On a 5 to 2 vote, the San Bernardino City Council on November 26 approved a redrafted Chapter 9 Bankruptcy pendency plan intended to maintain the city as a viable entity yet capable of providing a rudimentary level of municipal services. The plan allows the lion’s share of city employees to keep their jobs, while deferring payments to nearly all of the city’s creditors and vendors for some time to come.
The plan’s approval was opposed by councilmen Chas Kelley and John Valdivia.
According to cash projections for fiscal year 2012-13 provided with the plan, the general fund will receive $120,424,000 in revenue while continuing to spend $166,237,000. This means the city will have a base deficiency of $45,812,000. The city will be able to transfer in $4.83 million from reserves and other sources for an actual total operating deficiency  of $40.983 million.
According to the authors of the pendency plan, acting city manager Andrea Travis-Miller, director of finance Jason Simpson, and Michael Busch, the president of the municipal consulting firm Urban Futures, Inc., “The city of San Bernardino has reached a crossroads. Continued financial imbalance between revenues and expenses have now exhausted the city’s general financial reserves and burdened it with obligations it cannot pay, obligations that exceed its current year general fund resources by $45.8 million in fiscal year 2012-2013 and that, unless addressed structurally to be sustainable, will continue to grow in future years. Despite efforts to reduce expenditures and put the city’s financial house in order, the city is insolvent. During the past two years it became clear the city’s financial position was weakening and its employment contracts, post-employment benefits and unfunded liabilities incurred over the last 15 years cannot be supported if the city is to continue delivering services crucial to protecting the health, safety and welfare of the community.”
The city council can “protect the community and make sure that the city emerges from this financial crisis as a viable, sustainable institution,” Travis-Miller, Simpson and Busch said “only [through] the difficult process of restructuring its long-term financial obligations and fixed costs.” They then noted, “The city is working with its employee unions and associations, and its creditors, to reach agreements that would restructure the city’s unsustainable financial obligations.”
In the plan, Travis-Miller, Simpson and Busch cited the precedence of the city of Vallejo’s 2008 bankruptcy filing in exploring how San Bernardino can overcome requirements contained in the California State Constitution and San Bernardino’s own city charter which prohibit the city from adopting an unbalanced budget. They suggested that by deferring payments within the rubric of the Chapter 9 bankruptcy filing, the city could technically comply with the balanced budget requirement.
“Without restructuring its finances or maintaining the protection of Chapter 9, the city could not pay its employees, retirees, bondholders or vendors,” they wrote. “This would result in uncontrolled default and, presumably, a collapse of public services. Bankruptcy protection assures that this will not happen in San Bernardino, though we cannot say how much creditors will, or will not, receive. The term ‘pendency plan’ was developed in the city of Vallejo Chapter 9 case to describe the plan the city would operate under pending the completion of the bankruptcy process.”
San Bernardino may end up extending even further the amount of time it now intends to take to pay off its mounting list of creditors and may even shortchange some of those creditors.
“Amendments to the plan or extension of the plan into future fiscal years could occur,” Travis-Miller, Simpson and Busch stated. “Because the Great Recession struck Vallejo after it filed for bankruptcy protection it had to make many changes in its plan to adjust to worsening economic conditions. During the period the city operates under the pendency plan in bankruptcy, the differences between payments required by contracts and the amount actually paid become claims in bankruptcy and are resolved through negotiations and, ultimately, the plan of adjustment submitted to the creditors for approval and to the bankruptcy court for confirmation. In Vallejo, after three years, all classes of creditors voted to accept the plan of adjustment; however, under the Bankruptcy Code, the court can confirm a plan of adjustment even if some classes of creditors disapprove, a process known as ‘cram down.’”
City staff had earlier prepared pre-pendency plans which were submitted to the council on August 29, 2012, September 5, 2012, October 1, 2012 and November 19, 2012. The version submitted on November 26 adjusted those earlier plans somewhat, specifically calling for further reductions in the police force. While the city proposed fiscal year 2012-13’s budget  include 299 sworn officer positions, 18 of those positions were unfilled when staff first began work on the pendency plan and it is anticipated that as of December 1, there will be 31 vacant positions in the department, for a force structure of 268 sworn officers. By January 1, it is anticipated the force will have dwindled, through attrition consisting of retirements or layoffs, to 258 sworn officers, with funding available for only 260 officers, maximum. The city is further awaiting a contract proposal from the San Bernardino County Sheriff’s Department, since Travis-Miller, Simpson and Busch maintain “there may be significant savings or adjustments in the city’s overall cost to effectively police the city.”
The plan also calls for the city’s police officers to begin paying 50 percent of their retirement fund contribution, which is currently entirely picked up by the city. This will net the city savings of $3.252 million per year. Similarly, the city’s firefighters will be called upon to make a 50 percent contribution to their retirement fund, saving the city $1.894 million. A number of other city employees will be called upon to pick up fifty percent of their pension contributions, saving the city $651,000.  The city also intends to reduce firefighter overtime by 35 percent, saving the city $921,375, by staffing fire trucks throughout the city with three men.
“The pendency plan provides a balanced general fund through cost reductions to labor, benefits, debt and other obligations,” according to Travis-Miller, Simpson and Busch. They said the plan would “promote health, safety and welfare, minimize the impact on future services, balance costs and service impacts of reductions, build fiscal sustainability and maintain competitive compensation packages.”
There has been much criticism of what is considered to be the city’s excessively high compensation of city employees in terms of both salaries paid and benefits provided, and suggestions that this in large measure accounts for the city’s current financial circumstance. To that issue, Travis-Miller, Simpson and Busch propounded, “It is essential the city maintain competitive pay and benefit programs to retain and attract qualified, motivated employees. In the past, the city’s pay and benefit packages were among the most generous in its market area, sometimes significantly above the regional market. The city has, through negotiation or through imposition of reductions covered by its fiscal emergency powers, reduced compensation and benefit packages for its employees. These include employee payment of their California Public Employee Retirement System contributions, capping contributions to employee health plans and reducing costs by changing carriers, limiting pay outs, seeking new, lower pension benefit levels for new hires and eliminating retiree health insurance for new hires. The additional, but selective, changes here continue to address situations where compensation is above market and has created excessive liabilities that cannot be paid without unacceptable reductions in service. The primary reductions proposed herein relate to retirement costs and benefit structure.”
In voting against the plan, Valdivia complained that a 260-officer police force was insufficient to meet the city’s needs.
Calling the plan “deeply flawed,” Kelly said the city needed to spur economic development to increase revenue. He said the plan was not balanced in that it made no cuts to administrative services.
In a rare show of solidarity, mayor Patrick Morris and city attorney James Penman, who as longtime political rivals have blamed each other for the city’s deteriorating financial state, urged the council to put disagreements over specific elements in the plan aside and to support the plan in a show of unanimity that would convince the federal bankruptcy magistrate hearing the city’s case, Meredith Jury, to allow the bankruptcy reorganization to proceed.
City officials did not address the possibility or likelihood that some or many of its creditors, contractors or vendors with whom the city has ongoing contracts will cease the delivery of goods or services as a consequence of the payment deferrals.