Red flags over cities’ bankruptcy filings – SFGate

San Bernardino Mayor Pat Morris ponders a question Wednesday, July 11, 2012, regarding the Tuesday city council vote authorizing a bankruptcy filing outside San Bernardino City Hall in San Bernardino, Calif. City officials have said San Bernardino “has an immediate cash flow issue” and may not be able to make payroll with a budget shortfall of more than $45 million in the next fiscal year. (AP Photo/The San Bernardino Sun, Rick Sforza) Photo: Rick Sforza, Associated Press / SF

Sacramento —

San Bernardino’s stunning news last week that it was broke and needed to file for bankruptcy protection has some observers wondering who’s next.

San Bernardino is the third California city, after Stockton and Mammoth Lakes (Mono County), to declare bankruptcy within the past three weeks. And while Stockton’s June 28 filing wasn’t surprising – city officials had talked publicly about the problem for months – the moves by San Bernardino and Mammoth Lakes were.

Part of the reason, finance experts say, is that it’s not in a city’s best interest, financially, to bring up the possibility of bankruptcy: Talk of bankruptcy alarms credit rating agencies, which can use the public discussion as a reason to downgrade a city’s rating, leading to increased borrowing costs for the city.

“It’s in the public interest for them to be very, very careful about it,” said Chris McKenzie, executive director of the League of California Cities.

While city bankruptcies are rare, California cities are increasingly struggling with the slow economic recovery, smaller budgets, state budget cuts and the dissolution of redevelopment agencies.

This year, officials in the city of Hercules said they averted pursuing bankruptcy protection by settling a $4.1 million lawsuit from a bond insurer who filed suit after the city defaulted on a bond interest payment. The Contra Costa County city’s financial troubles were exacerbated by the loss of redevelopment funding, and it continues to struggle.

Warnings from 8 cities

An additional eight California cities, including Fairfield, which declared a fiscal emergency in April, have officially notified the municipal bond market this year that they are facing significant financial hardship, according to Matt Fabian, managing director of Municipal Market Advisors, which conducts independent research on the municipal bond industry.

The notifications don’t necessarily mean these cities are headed for bankruptcy court, but they do signal real adversity.

Along with Fairfield, the other cities include Arvin (Kern County), El Monte (Los Angeles County), Grover Beach (San Luis Obispo County), Lancaster (Los Angeles County), Monrovia (Los Angeles County), Riverbank (Stanislaus County) and Tehachapi (Kern County).

“I think people in our market are certainly getting more concerned,” Fabian said. “San Bernardino came out of nowhere, which makes you worry that there are others in a similar situation that you don’t know about.”

In Fairfield, officials said the city is not in danger of declaring bankruptcy but that it faces a deficit of almost $8 million in the 2013-14 fiscal year, which they said is because of the state swiping local dollars for its budget and the elimination of redevelopment agencies.

David White, director of finance and assistant city manager for Fairfield, said that after years of cutting back on services, the declaration of a fiscal emergency was necessary to place a sales tax increase on the November ballot.

“We are at the point now where we cannot cut any more from our budget without severely impacting services and the quality of this community,” White said. “I’ve never worried about going down the bankruptcy road.”

Tax revenue plummets

The unusual occurrence of three bankruptcy actions in such a short amount of time has raised red flags, though.

In Stockton, which filed for Chapter 9 bankruptcy protection, tax revenue plummeted with the national mortgage crisis, which hit the city particularly hard. Bad financial practices, overspending on civic structures and generous retiree benefits also brought the city to fiscal distress.

Mammoth Lakes filed for bankruptcy July 3 entirely because of a $43 million judgment against the city in favor of a developer who sued and won for a breach of contract for a hotel development near the airport. The action has been viewed as an outlier compared with the other two cities, whose financial problems are systemic and long term.

In San Bernardino, which faces a $45 million deficit for the current year, the situation is similar to Stockton. The city, home to 212,000 people, also was hard hit by the mortgage crisis and saw tax revenue plummet. Current officials say past city leaders mismanaged and misstated finances, perhaps intentionally, and that the city is overextended on employee costs. The elimination of redevelopment agencies by state leaders also blasted a hole in the budget.

“This city is in a dire financial situation. While many measures have been instituted over the last four years to balance the city’s budget, our financial situation has continued to decline, and that has brought us to a critical point,” said Andrea Travis-Miller, interim city manager.

Cities’ common traits

Stockton and San Bernardino share three characteristics that could help people better forecast which cities might be in danger of heading to bankruptcy, said McKenzie of the League of California Cities.

Those include cities with tax revenue severely affected by the mortgage crisis, cities that are older and have a significant amount of deferred maintenance, and cities that are unable to persuade public employee unions to agree to deep cuts in salaries and benefits.

McKenzie said he does not think the recent spate of bankruptcy actions makes other cities see it as a less stigmatized and more palatable action. He pointed to Vallejo, which entered bankruptcy in 2008 and emerged in 2011 with fewer firefighters, police officers and public services. Officials there have cautioned that bankruptcy is a last-resort solution that’s not only about numbers, but also about people and their jobs, quality of life and morale.

“Everybody remembers Vallejo. Everybody remembers sometimes the medicine is worse than the disease,” he said.

via Red flags over cities’ bankruptcy filings – SFGate.

Union contract negotiations continue – The Boston Globe

A meeting to continue contract negotiation discussions with the municipal clerical workers union has been rescheduled for Monday at 7:30 a.m. at Town Hall, said selectmen chairman Paul Salafia. The collective bargaining discussion is not open to the public. Salafia said negotiations were going well. Once an agreement is reached, Salafia said the board hopes to begin contract negotiations with other unions, including police and fire. The town is hoping to strike three-year contract agreements with everyone, he added.

via Union contract negotiations continue – The Boston Globe.

Marin Voice: San Rafael pension reform underway — with more to do – Marin Independent Journal

THROUGHOUT our campaigns last year for elected office in San Rafael, we repeatedly heard public concern about pension costs and the need for reform.

These public concerns, added to our own reservations, led to the immediate formation of the “Pension and Retiree Health Subcommittee” of the City Council upon our election.

Serving as the council’s subcommittee, together we have made these topics a top focus over the past six months.

We can report to you that San Rafael has already taken some meaningful and important steps, but there is still more to do.

The League of California cities did a survey earlier this year to gauge pension reform actions across the state.

About a third of the cities have adopted lower pension benefits for new hires, about 43 percent required employees to pay more toward their pensions, and about 21 percent required that pensions are based off of an average of three years rather than one to prevent pension spiking.

San Rafael has done each of these and more.

San Rafael employees pay the maximum allowed under the law toward their pensions, on average about 11.5 percent of each paycheck.

San Rafael adopted lower pension benefits for all new employees in 2011, including the anti-pension spiking measures.

On the retiree health care side, San Rafael capped current benefits and moved to the lowest benefit allowed by law.

In May,

the subcommittee recommended and the City Council adopted a Pension Reform Resolution (see http://www.cityofsanrafael.org/pensionreform) which stated the council’s intentions for reform.

Rather than adopt the more generic, statewide governor’s 12-Point Pension Reform Plan, we crafted our own resolution, allowing us to specifically focus on what has been done and what still needs to be done in San Rafael.

Included in this resolution were eight specific areas seeking statewide measures that would provide San Rafael, as well as all cities, more options to discuss with employees and that might reduce retiree costs in both the short and long terms.

The resolution calls for “hybrid” plan options that would combine a defined-benefit with a defined-contribution plan, like a 401(k). The new generation of city employees values the kind of portability that comes with a defined-contribution plan, as they are less likely than their predecessors to remain with the same employer for a career.

In June, the council adopted its 2012-13 budget, and we are happy to report, this year, we will be able to stop using reserve funds to meet our retiree pension and health obligations and we will begin fully funding those obligations with current operating revenue. The council has also reconfirmed its commitment to capping retiree health benefits.

In these first six months, we have been repeatedly impressed with the dedication and skill level of city staff. Our employees are the city’s most valuable resources and should be appropriately compensated, while at the same time the city needs to be fiscally responsible regarding short and long term budgets and financial realities.

Our Pension and Retiree Health Subcommittee will stay active and diligent on pension and retiree health issues to control our costs. There are additional elements that we can accomplish now and others that we will be working at the state level to obtain necessary reforms.

While much has been achieved, we shall strive to implement the goals of our Pension Reform Resolution to reduce our pension and health-care costs while continuing to recognize the significant contribution our employees make to enhance the quality of life for all in San Rafael.

via Marin Voice: San Rafael pension reform underway — with more to do – Marin Independent Journal.

Rutherford: Keep focus on pension reform

Pension reform needs happen quickly but fairly.

That’s according to State Treasurer Dan Rutherford. He made the comments during his trip to Jacksonville last week.

Rutherford says credit rating companies have clear a concern for them is a resolution to state public pensions. He says something needs to be done sooner than later but it must be done reasonably.

“[I believe] if you’re already retired then what you’ve got coming is yours,” says Rutherford. “If you’re in the system the amount of time you have left within the window available for retirement I believe should be you have a choice. One choice is keep the defined benefit you have and you pay a premium. Second choice is a different defined benefit and a different premium. The third is define contribution.”

He says major reform is necessary because lawmakers haven’t done enough in the past.

“The amount of the income tax increase that the Governor and the Democratic-controlled General Assembly put in place was almost dollar for dollar the amount necessary to pay the increase in the state pension system,” says Rutherford. “So, none of that money was able to go to pay down outstanding bills. It wasn’t able to go to areas of state budgeting that some feel they should have had additional resources given to. The increase was only an amount to pay the appropriate increase in the pension payments. It is not sustainable.”

Lawmakers couldn’t agree on a plan to ease the state’s $83 billion unfunded pension liability this spring. Governor Pat Quinn plans to meet with legislative leaders on the pension issue later this month.

via Rutherford: Keep focus on pension reform.

Hudsonhubtimes.com – Pension reform hearings planned

Columbus — The Ohio House plans to begin hearings this month on potential changes to the state’s five public employee pension systems, following the release of a study July 11 that included recommendations for built-in triggers and individual board authority to alter benefits based on fund performance.

But lawmakers haven’t determined whether any action of the pension reform packages will occur before or after the November election. Republicans and Democrats in the Senate have called for swift action, moving legislation before they broke for the summer; Republicans in the House, awaiting the results of the new study, say they’ll have hearings to make sure the resulting legislation is enough to ensure future retiree benefits.

The Ohio Senate already signed off on a series of bills changing eligibility, contribution levels and other provisions in state law related to the Ohio Police and Fire Pension Fund, the School Employees Retirement System, the State Teachers Retirement System, the Ohio Public Employees Retirement System and the Highway Patrol Retirement System.

The bills propose a number of changes to eligibility, cost of living increases and other retirement benefits in a way that generally allows those closer to retirement to be covered under existing guidelines and those farther away to fall under potentially reduced benefits. A couple of the systems would increase employee contributions to plans in coming years.

All of the changes were recommended by the individual pension funds, with support from union groups. The systems involve more than 1.8 million Ohioans.

— MARC KOVAC, CAPITAL BUREAU CHIEF

via Hudsonhubtimes.com – Pension reform hearings planned.

As We See It: Why cities go bankrupt – Santa Cruz Sentinel

Posted:   07/15/2012 01:30:55 AM PDT

Three California cities in two weeks declared bankruptcy.

Stockton, with a population of nearly 300,000, became the largest city in the United States ever to seek court relief to pay its bills.

Then Mammoth Lakes in Mono County, pop. 8,300, said it was bankrupt.

It didn’t take long for No. 3, San Bernardino, a city of 210,000 in Southern California’s Inland Empire, to join the Chapter 9 list. [A fourth city, Vallejo in Solano County, declared bankruptcy back in 2008 and has since emerged.]

Mammoth Lakes is an exception, because the small ski resort was hit with a $43 million court judgment in a developer’s lawsuit and had nowhere near enough money to pay it.

Ominously, what was once predicted for California — a mini wave of municipal bankruptcies — has come true.

The biggest factor causing insolvency for the bigger cities is the cost of labor and benefits — and that’s why these bankruptcies send shudders around the state and country.

It was one thing in good economic times to negotiate with public employee unions for higher municipal salaries, pensions the private sector could only dream about, and health benefits for retirees that have escalated in cost.

Those times ended almost four years ago, but the cities are still on the hook. As foreclosures mounted and property tax and sales tax revenues declined, cities had to face the music, and it’s been discordant.

Economic analysts say officials in Stockton

and San Bernardino made a series of bad decisions that added to their pain. For Stockton, it was incurring massive debt on downtown development projects; rosy revenue projections that would have paid the debt failed to materialize. San Bernardino ties police and fire salaries to wages paid in other, more affluent cities and lost its ability to negotiate with public employee unions.

Most California cities, say analysts, aren’t as bad off. Santa Cruz County cities, for instance, moved relatively quickly and decisively to renegotiate overly generous salaries and contracts, and to cut spending to begin living within their means.

Still, the San Bernardino situation is worth examining. The city says it will run out of cash in 90 days to pay its 800 or so employees and that its deficit will climb to $45 million this year on a $130 million budget. Retail sales in the city, which has an unemployment rate of nearly 16 percent, fell by 30 percent between 2008 and 2011. The assessed value of homes dropped nearly $2 billion in the same period; about 70 percent of homeowners in San Bernardino owe more on their mortgages than their homes are worth.

In the face of this decline, the city’s labor costs, which take up 80 percent of the budget, have been climbing. San Bernardino’s share of employee pension costs has more than doubled in the past five years and is now $2.2 million a year.

Faced with impending financial disaster, city leaders slashed the workforce, extracted temporary concessions from employee labor unions and auctioned off public land. But it wasn’t enough — and political infighting in city government kept officials from taking more drastic and even necessary steps such as raising taxes or outsourcing the police and fire protection.

Critics have noted the “concessions” involve allowing public safety new hires to retire with 90 percent of their salary at age 55, instead of 50.

It gets worse. A new finance director discovered that previous officials shifted money for workers-compensation and liability insurance to the general fund in a desperate attempt to balance the budget. San Bernardino’s city attorney, meanwhile, has alleged city financial documents were falsified during 13 of the past 16 budgets, sparking a criminal investigation.

San Bernardino also joins other cities in California in suffering from Gov. Jerry Brown’s decision to shutter redevelopment agencies. The city depended on about $6 million a year in redevelopment funds to pay for services like road repair and tree trimming, according to news reports.

The only upside is that bankruptcy allows the city to restructure its ruinous collective bargaining agreements, although it’s doubtful retirement benefits can be modified.

Any wonder taxpayers are losing faith in government’s ability to manage their money? Consider that the municipal bankruptcies are happening in a state where budget gimmicks, revenue shortfalls, unaffordable pension benefits and health care for retirees, and chronic deficits are now taken for granted.

As some cities struggle to stay afloat, Brown and legislators just finished passing a budget that will turn into a financial bloodbath if voters don’t approve tax hikes in November. Last we looked, that’s an iffy proposition.

Fortunately, there’s no legal precedent for states to declare bankruptcy. Yet.

via As We See It: Why cities go bankrupt – Santa Cruz Sentinel.

Link

Bankruptcy choices highlight fiscal pain of cities nationwide

The decision by three California cities to seek bankruptcy protection in the space of two weeks is unlikely to presage a wave of copycat filings. But it does underscore the mounting financial pressure facing local governments around the country.

Collapsing property values and entrenched unemployment have pushed cities and counties to the economic brink. Tax receipts in some locales have shrunk more than 20% over the last three years, and soaring pension costs exceed funding levels by as much as $3 trillion nationwide.

As the California cities of Stockton, Mammoth Lakes and, most recently, San Bernardino show, the temptation to flee to Bankruptcy Court is growing. Last year, four municipalities nationwide also applied for so-called Chapter 9 protection, including Jefferson County, Ala., which eclipsed Orange County as the largest such filing in U.S. history. Meanwhile, the Bay Area city of Vallejo emerged from its own reorganization.

All that has fed fears that American cities are lined up to fall like so many dominoes. But municipal bankruptcy filings are likely to remain rare for a variety of legal and political reasons.

What’s clear is that the fiscal pain experienced by U.S. cities is widespread and shows no sign of easing.

Link

San Bernardino struggled for decades before bankruptcy decision

San Bernardino’s fall was not fast.

The city has struggled for more than 30 years with a declining job base, dwindling business community and a steadily eroding housing stock.

“It’s a three-decade long experience,” said Mayor Pat Morris, noting, however, that the real blow to the city has come in just the past few years.

“Our current dilemma is not so much what happened way back then,” he said. “It’s what happened since 2007 and 2008.”

On Tuesday, the City Council, fearing the city would not be able to make payroll in August, authorized City Attorney James F. Penman to file for Chapter 9 bankruptcy protection.

San Bernardino Faces Criminal Probe – WSJ.com

By TAMARA AUDI And ERICA E. PHILLIPS

LOS ANGELES—Law-enforcement officials said they have launched a criminal investigation of San Bernardino city government, which voted to seek bankruptcy protection earlier this week.

The investigation has been going on for several months and includes other law-enforcement agencies, according to a statement from the San Bernardino County Sheriff’s Department released Thursday night.

“Several months ago at the request of San Bernardino City officials, the San Bernardino County Sheriff’s Department, along with the San Bernardino Police Department and the District Attorney’s Office began an investigation related to allegations of possible criminal activity within departments of the San Bernardino city government,” the statement said.

The Sheriff’s Department released no other details.

City officials blamed the bankruptcy authorization on the city’s collapsing economy and rising labor costs. The city of 210,000 about 60 miles east of Los Angeles has suffered more than other communities in the hard-hit county. Its property values plummeted; and 70% of its homeowners owe more money on their mortgages than their homes are worth. Unemployment in the area is stuck at 11.8%, and sales tax revenue for the city took a 30% dive in the past six years.

But city attorney James F. Penman said publicly this week that city officials have falsified financial reports for more than a decade. Mr. Penman didn’t name any officials in particular, and didn’t say how much of an impact those reports might have had on the city’s current financial situation.

“We have now learned that for 13 of the past 16 years the documents presented to the mayor and council were falsified that for 13 of the last 16 years the documents showed that the city was in the black when for 13 of those 16 years the city was actually in the red,” Mr. Penman said at a city council meeting this week when the council voted on bankruptcy.

Asked to elaborate in a news conference the following day, Mr. Penman said, “Any evidence of suspected wrongdoing has been turned over to the appropriate government agencies and there is little else I can share with you.”

San Bernardino city officials have acknowledged mismanagement of funds, but said they were unaware of any criminal actions or cover-up.

“I cannot speak to Mr. Penman’s allegation,” city spokeswoman Gwendolyn Waters said earlier this week. “However, I believe it is acknowledged by all our city officials that there were less-than-best practices in place and poor accounting that largely led to this problem.”

San Bernardino will run out of cash to pay its 800 employees within 90 days, Jim Morris, the mayor’s chief of staff, said earlier this week. The city expects its deficit to rise to $45 million in this fiscal year, Mr. Morris said.

Two other California municipalities have filed for bankruptcy protection in recent weeks: Stockton, in Northern California, and the resort town of Mammoth Lakes.

via San Bernardino Faces Criminal Probe – WSJ.com.