The San Bernardino Bankruptcy: A Wake Up Call for LA

LA WATCHDOG - The City of San Bernardino has run out of cash and with only $150,000 on hand it will not be able to meet its August payroll of an estimated $10 million.  

The City is also projecting a $45 million budget deficit, an amount equal to a whopping 38% of General Fund revenues of about $120 million.  

No wonder San Bernardino voted last week to seek protection from its creditors through a Chapter 9 bankruptcy filing.

And since its finances are so desperate, San Bernardino will declare a “fiscal emergency” so that it can head straight to the federal courthouse rather than engage in a 90 day mediation period behind closed doors as required by a newly enacted, politically motivated state law, AB 506, a laborious and very expensive process that did not help poor Stockton avoid a bankruptcy filing.

This bankruptcy filing, the third within the last month by a California city, caused a stir in the financially strapped City of Los Angeles.  

But Los Angeles City officials were quick to assure us that San Bernardino, dubbed the “armpit of Southern California” by one elected official, is a very different beast than the City of Los Angeles.

And indeed it is.

San Bernardino’s projected budget deficit is equal to 38% of its General Fund revenues compared to about 6% projected for Los Angeles over the next four years beginning July 1, 2013.  

The City of Los Angeles also has more diversified economy than San Bernardino which is highly dependent on the construction industry, especially since the closing of Norton Air Force base in 1994.

Furthermore, the annual income per household in San Bernardino of $40,000 is 20% less than that of Los Angeles, in large part because 40% of San Bernardino’s population is receiving some form of governmental assistance.  

In a rambling and disjointed report that makes recommendations for “budget stabilization,” the San Bernardino Finance Department suggests that the city “revise the ‘step’ process to slow down the annual growth of salaries.”

But this is totally unrealistic since personnel expenditures represent about 75% of General Fund expenditures and close to 100% of General Fund revenue.

To the contrary, union controlled San Bernardino will require extensive salary and benefit concessions and givebacks from its employees to offset its massive budget deficit, rolling back the increases over the last ten years that were not affordable, even in a good economy.

And this is the lesson for the City of Los Angeles.

Over the next four years, the City is projecting a cumulative budget deficit of $1.1 billion, the result of the significant increases in salaries, benefits, and pension contributions. And this deficit is understated since, among other things, it fails to repair and maintain our infrastructure or properly fund the City’s two pension plans that are underwater by $10 billion.

Now the City’s unions will obviously fight any concessions, give backs, or roll backs, claiming they have given enough, as City workers have increased their contributions to their retirement plans in an amount equal to 2% to 4% of their salaries.  

However, what the union leadership fails to mention is that between the July 1, 2005, the beginning of the Villaraigosa era of profligacy, to the end of the existing labor contracts in June of 2014, compensation levels have increased by about 30% to 35% to say nothing of the rising costs of benefits (up 50%) and pensions (up 150%).

Our Elected Elite and the union leadership will also point out that there are 5,000 fewer positions supported by General Fund, the lowest level since the Bradley administration.  

However, there have been fewer than 500 layoffs.

Rather, 2,400 senior City employees retired pursuant to the Early Retirement Incentive Program where each departing employee received a gift of $150,000 in increased pension benefits that will cost the City more than $300 million over the next 15 years.

The remaining employees (and their pension obligations) were dumped on the Department of Water and Power, the Port of Los Angeles, Los Angeles World Airports, and the City’s special revenue departments.

The City of Los Angeles needs to get its act together and tackle its billion dollar Structural Deficit where personnel costs are rising significantly faster than General Fund revenues.  But at the same time, it cannot continue to cut services, but must repair and maintain our streets, sidewalks, parks and the rest of our infrastructure and eliminate the $10 billion unfunded pension liability.

This will require the City to develop alternative means of delivering services, including public private partnerships for the Zoo, the Convention Center, selected animal shelters, and the municipal golf courses.  But the City should also consider more efficient delivery of other services, including, but certainly not limited to, residential trash collection, the maintenance of our parks and their facilities, the repair of our streets, fleet maintenance, and the operation of the City’s information technology operations.

But more importantly, the City needs to address the over the top increases in salaries, benefits, and pensions.  

This will include a combination of  increased payments for current medical benefits, serious pension reform, starting with the Mayor’s underwhelming eight point plan, higher contributions by City employees to fund their pension plans and post retirement medical benefits, and rollbacks of the over the top salary increases since 2005.

But more than likely, our Elected Elite will fail to take the necessary actions to address the Structural Deficit out of fear of offending the campaign funding unions.

And this is why we need a ballot measure that requires the City to “Live Within Its Means.”  

But, for the time being, there is no need to worry about the solvency of our City. Mayor Villaraigosa once again assured us that LA will not declare bankruptcy while he is mayor.  

Whew, what a relief, another 350 days of solvency.

(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- He can be reached at: –cw

Tags: Jack Humphreville, LA Watchdog, Los Angeles, San Bernardino, San Bernardino bankruptcy, LA budget, Los Angeles budget, LA bankruptcy, Mayor Villaraigosa

Vol 10 Issue 57
Pub: July 17, 2012