Nov. 26 (Bloomberg) -- As bankrupt San Bernardino, California, neared yet another contentious vote to cut spending, the city council took a five-minute bathroom break. With one councilman still gone 40 minutes later, those remaining traded accusations of dirty politics with shouts of “Shame on you!” Amid the arguing, the vote never happened.
Infighting and intrigue have complicated San Bernardino’s effort to pass an austerity plan due in U.S. bankruptcy court Nov. 30 as part of its application for Chapter 9 protection. Without it, the judge could dismiss the case, leaving the city open to lawsuits from creditors led by the California Public Employees’ Retirement System, owed about $143 million.
Political dysfunction is a factor in most recent municipal bankruptcies, said Matt Fabian, a managing director of Municipal Market Advisors, a Concord, Massachusetts-based research firm. Defaults in Jefferson County, Alabama, Harrisburg, Pennsylvania, and Wenatchee, Washington, were exacerbated by local political disputes, he said.
“In many or most of the cases of a governmental entity defaulting this year and last, management breakdown was a critical step in the default,” Fabian said in an e-mailed response to questions.
The council in San Bernardino, a city of 200,000 about 60 miles (100 kilometers) east of Los Angeles, is to meet tonight in its final scheduled session in advance of the court-imposed deadline for the austerity budget, known as a pendency plan.
There is still far to go before the council reaches a resolution. A procedural debate over whether a council committee needed to consider bankruptcy-related cuts to police and fire services, before coming to the full council for action, ended last week with one council member threatening to censure colleagues for insulting each other.
“As long as we continue to play politics, we’re not going anywhere,” Barbara Babcock, a 61-year-old resident who frequently attends council meetings, said in an interview. “We’ll be just another casualty.”
On Aug. 1, San Bernardino became the second-largest U.S. city to seek Chapter 9 protection from creditors, behind Stockton, California.
San Bernardino cited declines in property tax revenue due to the housing crisis. “Toxic” politics contributed by delaying higher taxes and budget cuts, Mayor Patrick Morris said.
San Bernardino’s charter, which is like a constitution for the city, complicates efforts to get spending in line with revenue by adding hard-to-overcome legal protections for everything from the city attorney’s office to the formula for police and firefighter wage increases, said John Husing, a Southern California economist.
Permanently fixing the city’s finances means changing the charter, a politically difficult task that requires a referendum, said Husing, who has advised several San Bernardino mayors in the last 30 years. City employee unions have successfully blocked changes that might diminish their political influence or cut their benefits, Husing said.
“The structure of the government is completely dysfunctional,” said Husing, founder of Economics & Politics Inc., a Redlands, California, consulting company. “It’s a bad structure that makes good government impossible.”
San Bernardino is one of about 120 California cities governed by charters. Because they are adopted by voters, the laws embedded in a charter trump state law when the two come into conflict, according to the League of California Cities. The other more than 350 cities are governed by the general rules set by the state, which means their local ordinances are subordinate to California law.
The formula setting pay for police and firefighters, protected by the charter, requires wages be comparable to similar-sized cities, regardless of whether those other towns have more or less tax revenue.
The charter “ties the hands of the city council from being able to set salaries for public safety that we can afford,” said Fred Shorett, a council member.
As the U.S. housing market collapsed, San Bernardino’s tax revenue fell almost $12 million, or 9 percent, from 2007 to 2011, according to a city budget analysis. Meanwhile, employee costs increased, driven by the council’s 2006 decision to lower retirement ages and boost pensions for police and firefighters. Pensions are forecast to consume 15 percent of San Bernardino’s budget in the year beginning in July 2015, up from 9 percent in 2007, according to budget documents.
San Bernardino last month defaulted on a $1.01 million payment on pension-obligation bonds, according to a Municipal Securities Rulemaking Board filing. The city has $90 million of outstanding general-obligation debt, an Aug. 29 report to the City Council said. The municipality is also responsible for an additional $200 million in securities issued for its redevelopment agency, which was closed this year under a law eliminating the function statewide.
The city’s leaders dealt with the widening gaps between revenue and expenditures by borrowing from special funds intended for sewer maintenance, workers’ compensation insurance and other purposes, interim City Manager Andrea Travis-Miller said in July after analyzing prior budget documents. The city turned to bankruptcy for help after the special funds were exhausted and Travis-Miller warned that the city would run out of money to pay employees.
Babcock said the seven-member City Council split into factions backing Morris, a 74-year-old former judge who was elected mayor in 2006, and James Penman, the 65-year-old elected city attorney, who ran unsuccessfully against Morris for mayor in 2006 and 2009. The power struggle distracted attention from the looming crisis, Babcock said.
Under the City Charter, Penman oversees the city’s legal affairs, including the current bankruptcy case. Morris has the power to hire the city’s top administrators, but does not get a vote on the city council.
On Oct. 1, the council failed to take action on a proposal to transfer trash collection to a private operator after two council members walked out, leaving the body too small to legally conduct business. One was Robert Jenkins, who holed up in the City Hall bathroom for 42 minutes, later complaining of an upset stomach.
An argument ensued among council members during the break, and the body never got around to the trash collection issue.
Penman said the feuding is part of the city’s heritage as a “blue-collar, working-class town.”
“This has always been the Old West much more than the rest of Southern California,” he said in an interview. “Fistfights were not unheard of in the parking lots outside of City Council meetings in the 1950s and ’60s.”
In December, U.S. Bankruptcy Court Judge Meredith M. Jury in Riverside, California, is scheduled to consider whether the city should remain under bankruptcy protection.
To stay in bankruptcy the city council must make progress on the pendency plan, which is a temporary budget San Bernardino will use while under court protection, Jury said.
“Without that, you can’t even be moving toward adopting” a permanent plan to adjust the city’s debt, Jury said in a court hearing earlier this month.
San Bernardino could ask Jury to change the city charter, a complicated legal maneuver that has never been tried in bankruptcy court, according to James E. Spiotto, a partner at Chapman & Cutler LLP in Chicago. Lawyers who specialize in municipal bankruptcies are split over whether a federal judge has the power to impose changes on a city charter.
San Bernardino’s mayor said he expects the austerity budget to be finished and approved when the council meets tonight.
“We’re in a survival mode as a city,” Morris said, “and when you’re in survival mode, it tends to focus the mind.”
The bankruptcy case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).