Bankruptcy

San Bernardino Files for Bankruptcy; Staff Had Been Concealing Deficit Spending for Years

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San Bernardino will be the third California city to file for bankruptcy in less than a month. The city faces a $45 million budget deficit, half of which is unfunded liabilities in retirement, workers' compensation, and general liability accounts. The city drew in $78 million in revenue for the 2011-12 fiscal year.

Was this bomb well-hidden?

San Bernardino City Council voted 4-2 in favor of filing Chapter 9 bankruptcy Tuesday night. The most surprising little detail (and one that seems to be getting lost in all the numbers) came from City Attorney James F. Penman, who told City Council that it had been getting falsified budget numbers for years. Via The Sun (San Bernardino):

Penman also said at the meeting that for 13 of the last 16 years, the council had been given falsified budget documents. Those documents said the city was in the black when, in fact, it had been deficit spending, he said.

That period covers the tenure of multiple city managers and sets of elected officials, but it predates Acting City Manager Andrea Travis-Miller and Finance Director Jason Simpson, whom he said discovered the discrepancy.

Travis-Miller's report (pdf) for City Council showed that city reported starting the 2011-12 fiscal year with $2 million in the general fund when in fact it was already $1 million in the hole. The city has already cut staff by 20 percent and had negotiated a $10 million concession from employees that is about to expire:

Unfortunately, the decline in taxable sales and property values over the last several years has resulted in revenue losses of $10 to $16 million annually. Additionally, previously negotiated compensation reductions will sunset at the conclusion of fiscal year 2011-12 creating an increase in salaries and benefits of $10 million effective July 1, 2012, and increased costs in future years as merit increases resume. Beginning in FY 2012-13, expenditures are projected to exceed revenues by $45 million and absent any changes to improve revenues and reduce expenditures, the City will face increasing annual deficits. The City's financial constraints are compounded with the depletion of all General Fund reserves, which were as high as $19 million in 2001, and failure to fund long-term liabilities.

San Bernardino (population 210,000) joins Stockton and Mammoth Lakes in recent bankruptcy announcements.

In other related California news, a new Field Poll shows state voters have mixed feelings about public employee pension reform.  Significant majorities support raising the retirement age and placing a cap on benefits. A small majority, however, opposed limited collective bargaining rights for public sector workers. But as Reason Foundation Director of Polling Emily Ekins has noted, describing collective bargaining as a "right" in polling questions can significantly alter the results.

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  1. Yep, it’s starting to look more and more like Meredith Whitney was right, but her timing was off by a little bit.

  2. If I ran a business and lied about by finances to get bank loans and then said business later went bankrupt, wouldn’t I be guilty of bank fraud and be doing some federal time as a result?

    1. I was thinking the same thing. When is somebody going to be put in jail for this? Where are all the people who were commiting fraud, their current employers should take a hard look at everything the have done to see if the fraud is being repeated.

      1. I can only assume that the California GOP is responsible and the only way to stop this practice is to stop electing teabaggers.

        1. If it wasn’t for the GOP and the Tea Baggers, these poor public servants wouldn’t have had to lie.

          1. If it wasn’t for the GOP and the Tea Baggers, these poor public servants wouldn’t have had to lie.

            Their hands were tied! TIED!

            1. Yes, SugarFree. Go on. What happened next? Let the filth flow through you.

              1. Fifty Shades of Gray Davis

              2. Nothing else happened.

                Oh, wait, that belongs on the San Antonio thread.

                1. Oh, wait, that belongs on the San Antonio thread.

                  Unfortunately, it probably works on this thread as well.

        2. Are there still Republicans in California outside of Orange County? I thought TEAM Blue summarily executed all of the free-range ones or sent them to the reeducation camps.

          1. They had Republican Governors, so according to shriek and Tony, the GOP is what’s wrong with these Democrat Party dominated cities.

          2. They weren’t executed, they simply surrendered.

            The only difference between the CAGOP and your average Frenchman is that the French at least had the good humor to build the maginot line for appearances.

        3. San Bernardino has been reliably Democratic for years. This, however, has little to do with party. The county has had a number of officeholders indicted over the years. The corruption is endemic. What remains to be seen is whether this is corruption or incompetence.

      2. What about the people who bought bonds relying on the fraudulent financial reports? People should go to prison over this.

        1. Yet no one will. Rule of law FTW!

        2. No person of good conscience buys government debt. Until these buyers start losing money in huge piles, governments will meddle in far too many activities that are none of their business.

  3. Let’s take a look at some of the councilmembers:

    Councilwoman Marquez is a member of the following professional organizations: California Correctional Peace Officers Association, Parole Agents Associations of California, California Narcotics Officers Association, Women’s Club of San Bernardino, Native Sons of The Golden West and The Greater Rialto Democratic Club. Councilwoman Marquez is a member of Our Lady of Guadalup? Catholic Church.

    1. good grief…talk about a Murderer’s Row of leeches. And folks are surprised by what their elected officials do.

  4. the decline in taxable sales and property values over the last several years

    Because people and businesses are fleeing your fiscally-fucked-up state “for the last several years”.

  5. Robert is a Special Education Teacher who works with High School Students with Disabilities. Robert has worked for Riverside County Office of Education since February of 2004. Robert is active with the Best Buddies Club, an organization that builds relationships between Special Education students and their peers in General Education

    .

  6. Councilman Valdivia carefully monitors policy in surrounding municipalities, along with county, state federal programs, and, corresponding transportation initiatives that will impact the wallet of the local taxpayer impact businesses. Furthermore, John often calls into question the priority list of the elected and compares it with the huge gap expressed from the constituents he serves.

    Yay!

  7. Penman also said at the meeting that for 13 of the last 16 years, the council had been given falsified budget documents. Those documents said the city was in the black when, in fact, it had been deficit spending, he said.

    We can expect charges to be filed against the ones responsible, right. Also, wasn’t the city audited, and if so, why didn’t the auditors find these issues?

    1. If you bought those bonds without looking at the city’s finances, you kind of got what you deserved. If you did and the city lied to you, then the entire council and comptroller should be going to prison for fraud.

    2. This just means that the auditors were either incompetent or in on the fraud. Whichever accounting firm did the auditing should be investigated, and the auditors should lose their CPA liscences.

      1. Whichever accounting firm did the auditing should be investigated, and the auditors should lose their CPA liscences.

        Yes, and the firm would also be held responsible for the misconduct as well. Hope they have deep pockets.

      2. Yeah, this sounds like the kind of thing that could quickly expand in scope. How many other cities were following similar practices and getting a similar pass from their auditors? I have trouble believing that San Bernardino was the only one. They were probably just the worst offender.

        1. Or the first one to go bankrupt.

    3. Yeah, what Ex Nihilo said.

      Weren’t they audited by some outside agency?

      this makes me wonder what is going on in Illinois. Especially Cook County.

  8. Does anyone even care what happens in California anymore in regards to budgets and good governance?

    1. I’m sorry…did you actually type California and good governance in the same sentence?

    2. I do, because I’m stuck here at least until March 2014. Bah.

    3. Sure, Paul.

      California and budgets: they are not balanced.

      California and good governance: there isn’t much, if any.

      Glad to help.

  9. San Bernardino (population 210,000) joins Stockton and Mammoth Lakes in recent bankruptcy announcements.

    I move that we all start calling California “West Greece.”

  10. Gah. 17% of voters don’t think public pensions are generous enough. Of course, according to the BLS, 23% of the California labor force works in “Education Health Services” or “Government” so I supposed it’s to be expected.

  11. I’m a little lost in the details.

    “Penman also said at the meeting that for 13 of the last 16 years, the council had been given falsified budget documents. Those documents said the city was in the black when, in fact, it had been deficit spending, he said.”

    The City’s financial constraints are compounded with the depletion of all General Fund reserves, which were as high as $19 million in 2001

    Okay, so basic dictates that if we subtract 2001 from 2012, we get 11 years.

    How was the city deficit spending in 13 of the last 16 years (due to fraud) when it had a surplus 11 years ago? Was 2001 one of the 3 years where falsified data WASN’T given? I need more details because this doesn’t make sense. Wouldn’t the “Surplus” have been another fiction perpetuated by the aforementioned fraud?

    1. I’ll be keeping an eye on this one for a bit to see what happens. I skimmed the whole report and I didn’t see an explanation for falsified budgets at all. It was brought up at the meeting. It could have been deficit spending from the main general fund and drawing from the reserves, which is what depleted them.

      I personally am fascinated (in a horrified way) that this was going on during the boom of the mid-’00s.

    2. Not a contradiction. It makes perfect sense.

      Deficit spending: Spending more than you make in that year

      General Fund reserves: money in savings.

      11 years ago, the city had money in the banks, $19 million. However, even that year and the year before, the city was actually spending more each year than it took in and depleting those reserves.

      1. That still doesn’t track though, because you’d only have had those reserves if the amount being spent was accurately being reported.

        If in 2000 you told people you were operating in the black but were in the red, then your savings (reserves) are a false number on their face.

        If I lie and say I have $500 in my checking account when it’s really negative $500, that ultimately has to affect the amount I claim is in my savings (reserves).

        It seems to me that the “surplus” was a farce to begin with because it only existed in an accounting gimmick.

        1. If I understand it correctly, they actually were spending down their reserves but not reporting it correctly to the council, but they have access to the correct books now.

          The council may have been both dumb and trusting of the staff.

  12. Will the third city in California going broke in the past two weeks be the charm that wakes people up to this epidemic? Each one of these cities has their own unique problems, but when cities broker unaffordable worker contracts based on unsustainable economic assumptions you’re bound to run out of money (http://bit.ly/LFc4CU).

    Liabilities like pensions have never been more volatile (http://bit.ly/NI6UCi). Cities need to be smarter when they lock themselves into inflexible contracts. If they don’t we’re bound to see more cities follow in the footsteps of these cities and ultimately public employees are much worse off for it.

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