By Mark Gutglueck
In a tacit indication that San Bernardino city officials have abandoned the strategy of staving off a second municipal bankruptcy by substantial reductions in the salaries and benefits provided to city employees, the city council and mayor this week in a 5-to-3 vote finalized the promotion of Assistant City Manager Teri Ledoux to city manager.
In doing so, the council conferred upon her a raise of nearly $50,000 over what she was being paid for serving in the role of acting city manager, which she took on when the council suspended former City Manager Andrea Travis-Miller in April. The action brings Ledoux’s total compensation package to over $300,000 per year.
The council in May fired Travis-Miller, creating the need to fill the city manager vacancy.
Travis-Miller, who was a key assistant to former City Manager Charles McNeely, had herself been elevated to the role of acting city manager in 2012 when McNeely left the city under the strain of dealing with intractable financial problems besetting the county seat. It was under Travis-Miller’s guidance that the city made its August 2012 filing for Chapter 13 bankruptcy protection in Riverside Federal Court. Miller remained in place as acting city manager for the next six months, departing to head, as executive director, the San Gabriel Valley Council of Governments in February 2013. She thereafter was hired as the city manager in Covina, but came back to San Bernardino as assistant city manager in October 2016.
In June 2017, just two months shy of the five-year anniversary of San Bernardino having entered into bankruptcy, the city emerged from Chapter 13 protection. Over the course of those five years, the city had tentatively regained its financial footing by getting Federal Bankruptcy Judge Meredith Jury to acquiesce in the $350 million stiffing of more than 200 of its creditors, some of whom were paid 60 cents on the dollar, others 50 cents on the dollar, others 40 cents on the dollar, others 30 cents on the dollar, with one class of those to whom the city owed money, litigants against the city who had prevailed in court on various lawsuits, getting just one cent on the dollar for the first million owed to them for those judgments.
Two months after the city’s exit from bankruptcy and after the departure of then-San Bernardino City Manager Mark Scott, Miller was hired, in August 2017, on a five-year non-guaranteed contract, as San Bernardino City Manager. In October of that year, she arranged to lure Ledoux, then working as the assistant to the city manager in the City of La Verne, to take on the assignment of assistant city manager in San Bernardino.
Part of the incentive Ledoux was given in making that transition was a sizable increase in pay. In La Verne, Ledoux was pulling down a yearly salary of $114,437.10 with $22,645.25 in benefits. The pay range for assistant city manager in San Bernardino ran from $172,000 to $213,000 yearly. Travis-Miller arranged for Ledoux to be brought in at a significantly higher salary step than was normally provided to a newly-hired assistant city manager, such that Ledoux’s hiring in San Bernardino represented a salary boost for her well in excess of $70,000 annually. Additionally, the benefits provided to Ledoux in San Bernardino were, at over $40,000 annually, close to double those provided her in La Verne.
Upon her elevation to acting city manager status in April, Ledoux’s annual salary was bumped up to $212,000.
How much money Ledoux would demand to have the qualifiers “acting” or “interim” detracted from her title and keep her in the role of city manager was of some moment. As she comes into the position, roughly two years after San Bernardino’s departure from bankruptcy, the city again finds itself behind the eight ball financially.
When the City of San Bernardino’s budget for the recently concluded 2018-19 fiscal year was drawn up and that spending plan passed by the city council last year, Travis-Miller in her then-capacity as city manager and then-Finance Director Brent Mason projected the city spending $166,357,066, of which $126,247,699 was accounted for in the city’s general fund and $40,109,367 in other funds that include special revenue, enterprise operations, and internal services. Travis-Miller and Mason said the city could afford all elements contained in the spending plan, which entailed a five percent increase in the general fund over the previous year, based upon $168.943,334 in anticipated revenue, allowing the city to net a surplus of $2,586,268, which was to be salted away in its reserves. As the fiscal year progressed, however, it became apparent, primarily because of a shortfall in the actual amount of revenue from gasoline tax that was to come to the city, that San Bernardino was not meeting the revenue projections assumed at the outset. Ultimately, it turned out, the amount of money the city took in during 2018-19, running from July 1, 2018 through June 30, 2019, was off by nearly $13.8 million, such that not only did the city not realize the $2,586,268 surplus, it actually received roughly $11.2 million less than the $166,357,066 it was going to spend.
The warning signs were clear: the city is heading, unless significant adjustments are made, back toward bankruptcy. Midway in 2018, the optimistic projection was that for the 2018-19 fiscal year, the city would fare well. But the modeling Travis-Miller and Mason were using at that time was less sanguine about future years. Based solely on what they could see at that time, Travis-Miller and Mason indicated that the projected revenues for 2019-20 set against the city’s projected expenditures would result in a $4.3 million deficit for that year; and that the modeling showed that the projected revenue to expenditure gap would continue to grow over the next three years until by 2022-23 the city was projected to run a $7 million deficit that year. Moreover, according to Travis-Miller and Mason, the city was on a collision course with its unfunded pension liability issue, such that the city, which was required to put up $20 million as part of its contribution to the California Public Employees Retirement System in 2018-19, would see that payment zoom to $40 million by 2028-29.
At the outset of 2018-19, the city had some $33 million in its reserves and was anticipating adding another $2.86 million to that sum during the just concluded year. With the gas tax shortfall, however, the $2.86 million never materialized and instead, the $11.2 million deficit ate into the city’s reserves such that the city now has less than $22 million in its rainy day account.
Prognostications, based on the best figures available, now indicate that the city, which ran an $11.2 million deficit in just concluded 2018-19, will see that annual deficit jump to $16 million by the end of 2019-20, $18 million to $19 million by 2020-21, $23 million to $25 million by the end of 2021-22 and $30 million to $34 million by the end of 2022-23. While those numbers are somewhat short of the $49 million operating deficit the city was faced with in 2012 just prior to its Chapter 13 filing, the city’s present reserves of less than $22 million are on a trajectory to be depleted to zero by the end of October 2020. At that point, unless the city’s spending patterns have been drastically altered, the city will not only be spending more money than it is bringing in, it will have no other source to make up for that deficit. Accordingly, the City of San Bernardino’s second bankruptcy filing could come as early as November or December 2020.
Considerable thought has been given to finding some way for the city to make its way up the steep and slippery path from the fiscal abyss it is being drawn down into.
An intrinsic element of the city’s dilemma is the overly generous salaries and benefits, given the restrictions on the city’s multiple revenue streams, that have been paid to San Bernardino’s municipal workers for decades.
Personnel costs in the city entail, on average, in excess of 91 percent of the city’s budget. While it had been the hope of Patrick Morris, who was San Bernardino’s mayor when the city declared bankruptcy in 2012, as well as the intention of the mayor who succeeded Morris, certified public accountant Carey Davis, that the bankruptcy could be used as a means by which the city could adjust the exorbitant costs it was bearing in personnel costs, that did not prove to be the case. In the four years and ten months between the time it entered into bankruptcy in August 2012 and its emergence in June 2017, the city while skipping out on just over $350 million it owed to a combination of some 209 creditors, vendors and partners, was unable to make any meaningful adjustment in what it is paying toward its most substantial cost – its employees. Left largely unscathed by the financial devastation the city was experiencing were the city’s workers, who continued to draw unreduced paychecks throughout the ordeal. They have seen no reductions in pay and their benefits remain intact, including the pensions they were promised by past mayors and city councils, though going forward the city’s employees are now being called upon to make a slight increase in their individual contributions toward their retirement benefits.
Thus, after five years of bankruptcy and two dubitable years of recovery, the underlying problem that sent the city into the pit of financial hell still exists.
What had emerged, prior to the extension of the contract to Ledoux was a tentative strategy that was both bold and desperate, painful for some to contemplate, startling and outside the box. But given the city’s untenable position, it existed as the best, and perhaps even the last option to keep the city’s ship of state from being capsized by the colossal financial swells threatening it.
Indeed, last month, before the departure of Bill Essayli, who since December had served as Mayor John Valdivia’s chief of staff, the city council undertook what appeared to be a test run for such a strategy, seizing upon the opportunity that the 2016 passage of a revamped charter, which Valdivia at that time opposed, presented them. In addition to a host of other reforms, the charter revision eliminated the city attorney and city clerk positions as elected offices. Using its authority at a specially-called meeting on June 11, the council voted 4-to-2, with Councilman Jim Mulvihill absent, to reduce City Attorney Gary Saenz’s pay rate over the final nine months he will occupy the elected city attorney’s position by 45.8 percent and to reduce City Clerk Georgeann Hanna’s pay during the same period by 59.2 percent. Thus Saenz, who formerly made $246,266 in total annual compensation as city attorney, has seen the amount of remuneration he is to receive between July 1, 2019 and March 31, 2020 reduced from $184,700 to $100,000. Hanna, who was receiving $171,466 in total annual compensation as city clerk, including salary, benefits and add-ons, is now having her compensation over the same nine-month span reduced from $128,600 to $52,500.
It was thought that Ledoux, whose experience, résumé, skillset and portfolio as a municipal management professional are thin, might prove amenable to accepting a total compensation package that was roughly two-thirds that which had been provided to her predecessor. In practical terms this meant that Ledoux would be given a $175,028.34 annual salary, coupled with $30,770.61 in benefits, for a total annual compensation of $205,798.94, as compared to the $307,941.56 in total compensation on a yearly basis Travis-Miller had made, consisting of her $262,542.50 annual salary and $45,399.06 in annual benefits. One justification for the difference consisted of the consideration that Ledoux’s previous experience paled in comparison to that of Travis-Miller. Ledoux’s top assignment career-wise consisted of her time as San Bernardino’s assistant city manager and acting city manager over the previous three months. Travis-Miller, on the other hand, had been city manager in La Mirada and Covina, had headed the San Gabriel Valley Council of Governments joint powers authority, and boasted her two stints with San Bernardino as assistant to the city manager/acting city manager and assistant city manager at the time she was promoted to city manager in 2017.
More importantly, however, was the moral, practical and situational authority Ledoux’s acceptance of the lower salary and benefit package would vest in her and thereby set the stage for her and the city’s political leadership to ask the city’s workers to voluntarily take across-the-board 25 percent pay cuts.
If the city’s workforce complied with that request, the city would be able to meet its financial burden, keep its head above water, and prevent its expenditures from greatly outdistancing its income, make the escalating payments into the California Public Retirement System to ensure that the city’s retirees receive the pensions promised them, and spare the city the ignominy of again going into bankruptcy court to seek permission to avoid paying its way in the world.
As it turned out, however, Ledoux was having none of that. She insisted that she receive 99 percent of what Travis-Miller was remunerated by the city. Moreover, she refused to be paid anything less than $10,000 more than San Bernardino’s police chief. Thus, the contract that was considered by the city council on Wednesday night this week provided for her receiving an annual salary as of that night of $259,674, benefits running to roughly $46,000 per year, a guarantee that she receive a salary at least five percent higher than that provided to the police chief and that she be given, as of August 1, a 3.5 percent raise.
The contract was backdated to July 1, 2019 and runs through December 31, 2020.
Assuming Ledoux remains in the position at least 12 months of the contract’s 18 month duration, it will up her pension, provided to her under the auspices of the California Public Employees Retirement System and her contract, from the $122,472 she is eligible to receive yearly upon retirement at present to an annual pension of $181,642.50. She will receive that amount of money, per year, for the rest of her life.
While council members Fred Shorett, Sandra Ibarra and Jim Mulvihill voted in opposition to extending the contract to Ledoux, council members Henry Nickel, Bessine Richard, Juan Figueroa and Ted Sanchez voted to approve it, as did Mayor John Valdivia. Shorett cited the long term escalation of costs to the city in terms of the increase in Ledoux’s pension in enunciating his reason for opposing the contract.
The short term of Ledoux’s contract – 18 months – together with her age, 61, is an indication that she intends to retire with the expiration of the contract. This is seen as an acknowledgment that Ledoux is intended less as a permanent city manager committed for a significant duration, but rather as a caretaker. Given that the council agreed to hire her at what is essentially the same rate of pay as was provided to Travis-Miller, the opportunity to apply the strategy of uniformly reducing the salaries and benefits of the city’s employees to obtain the savings needed to stave off bankruptcy has been essentially obliterated. Had Ledoux gone along with accepting a more modest salary and benefit package, she would have been in a position to ask the rest of the city’s workforce to voluntarily take 25 percent pay cuts. It now appears that either Ledoux toward the end of her 18-month tenure as city manager or her immediate successor will be obliged by the exigency of the city’s financial circumstance to lay a significant number of city employees off in order to achieve the economies that could otherwise be had with salary reductions. Logically, Ledoux will at some point, most likely sooner rather than later, have to undertake a study to determine which of the positions on the city’s payroll are not absolutely crucial to municipal function and can thus be permanently eliminated. It is further likely that a significant number of city positions deemed necessary for the continuation of municipal function and the provision of services will be filled by contractual arrangements, by which young and qualified candidates, eager to obtain municipal experience or positions, would be hired at salaries or hourly rates approaching 25 percent lower than is being provided to current city employees holding those positions.
It is therefore anticipated that the city will, in the month or two prior to Ledoux’s scheduled retirement, need to initiate massive layoffs of city employees. At present, the city’s work force stands at 722, which is under 55 percent of the city’s peak level of 1,319 employees in 2007-08. If the layoff option is applied in such a way that it is effectuated uniformly across all levels of employees in terms of pay grade, the city’s workforce will need to be reduced to 541, meaning layoffs of 181 municipal workers would likely need to be initiated within the next 18 months. If for practical considerations the city must hang on to its higher ranking and higher paid employees such as department heads and assistant department heads, there will need to be a higher number of layoffs, such that the city’s employees may be reduced to fewer than 520.
At that point, the city’s only other viable option will be to go into federal bankruptcy court once more to seek refuge from its creditors. That stratagem, however, is by no means a surefire one. The possibility yet exists that whatever bankruptcy judge the county comes before, either Judge Jury or another federal judge assigned to hear the city’s bankruptcy petition, would make a finding that given that San Bernardino had already spent five of its last eight-and-a-half years under the bankruptcy court’s protection and was yet unable to put its financial house in order, the city’s ability to remain as a going concern is so questionable that bankruptcy is not a reasonable solution, instead putting the city into receivership, a step which would be likely to lead to the outright disincorporation and decertification of San Bernardino as a municipal entity altogether.
By Mark Gutglueck