San Bernardino bankruptcy: Other California cities could be next
San Bernardino this week became the third California city to seek bankruptcy protection in the last month, and experts say it might not be the last.
"There are likely to be more in the future, but it's hard to know, since a lot of struggling cities may manage to work things out,'' said Michael Coleman, a fiscal policy adviser for the California League of Cities. "Some cities may not go into a bankruptcy, but they may dissolve. They may cease to exist.''
Once rare, turning to bankruptcy has become a painful but enticing option for cities whose labor costs and municipal debt far outpace anemic tax revenue. The Bay Area city of Vallejo began the current trend in May 2008, filing for Chapter 9 bankruptcy protection because, city leaders said, salaries and benefits for its public safety workers were eating up too much of the general fund.
Last month, Stockton became the largest city in the state to seek bankruptcy protection after it was unable to come to agreement with its employee unions and creditors on a plan to close a $26-million gap in its general fund.
On July 2, the tiny resort town of Mammoth Lakes filed bankruptcy papers in part because it was saddled with a $43-million court judgment it couldn't pay.
Rising public pension costs are one of the catalysts pushing cities into fiscal peril. In San Bernardino, the city's obligation to its employee retirement system rose from $1 million in the 2006-07 fiscal year to nearly double that in the current budget year. In three years, those costs are expected to swallow 15% of the budget.
Pension spending grew an average of 11.4% a year in the state's biggest cities and counties from 1999 to 2010, roughly twice as fast as spending on public safety, social services, recreation, health and sanitation, according to a February report by the Stanford Institute for Economic Policy Research.
Joe Nation, a Stanford economics professor and co-author of the February report, thinks for at least some cities, insolvency is inevitable unless they can wrest much bigger concessions on salaries and pensions from public employees.
"I think this is the tip of the iceberg in terms of the problem,'' Nation said. "Stockton was spending $12 [million] or $13 million on pensions 10 years ago. By 2010, it was $30 million … and will double again over the next five years, unless something is changed."
— Phil Willon, Catherine Saillant and Abby Sewell
Photo: San Bernardino Mayor Patrick J. Morris says the city may be forced to dissolve its Fire Department or portions of the Police Department, an unavoidable reality when public safety accounts for nearly 75% of the general fund budget. Credit: Irfan Khan / Los Angeles Times