Bankrupt California City Seeks to Fix Politics and Finances

  • San Bernardino says reform key to improved fiscal performance
  • City asking voters to take power away from elected officials

Fixing San Bernardino’s broken budget will help get the city out of bankruptcy. Fixing the city’s politics may help it stay out.

The California city is trying to become the first U.S. municipality to overhaul its political structure while in bankruptcy, asking voters to approve a new charter that strips the mayor and city council of day-to-day operational control. If the ballot measure wins in November, San Bernardino would join the majority of U.S. cities in which elected officials hire a professional manager to run operations, according to the National League of Cities.

San Bernardino’s "charter doesn’t properly delegate responsibility between various city officials,” said bankruptcy attorney Marc Levinson, who led the California cities of Stockton and Vallejo through the bankruptcy process. “There are not clear lines.”

The city filed for bankruptcy in 2012, blaming a loss of tax revenue, high-priced employee pensions, and a city charter that separated the cost of police and fire salaries from the city’s ability to pay. It’s now nearing the end of its time under court protection, having negotiated settlements with its biggest creditors, including pension bondholders owed about $90 million. Final approval on a plan to reduce debt by about $200 million could come as early as next month when the city is due back in court.

‘Eight Mayors’

In a hearing on Oct. 14, U.S. Bankruptcy Judge Meredith Jury praised the city’s progress and said that the plan is nearly ready for her approval. Once Jury signs off, the city could exit court oversight.

While that will straighten out the city’s finances, its politics depend on the ballot measure. San Bernardino now has both a city manager and a mayor, each employed full-time to oversee different aspects of the bureaucracy. The seven members of the elected city council also have a hand in managing the municipal workforce, from street workers to librarians, city manager Mark Scott said.

“It’s almost like we have eight mayors," said Scott, who said the structure is unlike anything he’s seen in more than 40 years of public service in various California cities.

Mayor R. Carey Davis has been a vocal supporter of charter reform, and six of the seven council members voted in August to put the proposed changes on the ballot.

Housing Bubble

The city, founded in 1854, is located about 60 miles east of Los Angeles in California’s Inland Empire, once know for its agricultural production. Turning to residential, industrial and commercial development after World War II, San Bernardino’s economic slide began in the 1980s with the closing of major nearby employers including Kaiser Steel Co. and the Santa Fe Rail Yard. A new freeway robbed the city of travelers cruising between LA and Las Vegas, prompting retailers to relocate to new malls about 15 miles west. By 1995, when the U.S. Air Force shut down the local base, a campaign to revitalize downtown was floundering.

Then came the housing bubble of the 2000s, which flooded San Bernardino with new homes. When prices plummeted after 2007, the city’s foreclosure rate rose to 3.5 times the national average. Property tax revenue dropped $4 million to $7 million each year following a peak in 2009. In 2011, the U.S. Census Bureau ranked the city as the second poorest in the nation behind only Detroit, which also filed for bankruptcy.

Under San Bernardino’s current charter, police salaries are set using a survey of 10 other California cities, all of which are better off financially. The median income in the city is about $37,000, or less than two-thirds that of the state.

About Leadership

Opponents of charter reform argue that it was bad leadership, not the governmental structure, that pushed San Bernardino into bankruptcy.

“I think the strong-mayor system worked for the city and I say that because of the experience I had,” former Mayor Judith Valles said. Citizens should have an elected official with direct authority over city services instead of a council and mayor who only set policy and leave the details to a hired professional, Valles said.

Valles acknowledged that the charter can create conflict. After she was elected in 1998, the “city council did try to micromanage” some city departments, Valles said. Once she asserted herself, those problems receded. “It has to do with leadership,” Valles said.

Less Politicized

Changing the structure of a local government won’t automatically win the trust of the municipal-bond market, said Eric Friedland, director of municipal research in Jersey City, New Jersey, for Lord Abbett.

“It’s situational,” said Friedland, who hasn’t been involved in San Bernardino’s bankruptcy. While having a professional manager run city operations would be less politicized than the elected officials, “just because something is politicized doesn’t necessarily mean that it would lead to bad outcomes,” he said.

San Bernardino was one of four California cities to file for bankruptcy between 2008 and 2012. The others, Vallejo, Stockton and Mammoth Lakes, all ended their Chapter 9 cases without making drastic changes to their governing structure. Reworking its charter while in bankruptcy would make San Bernardino unique in the modern era, said attorney James Spiotto, who writes about the history of municipal bankruptcy.

But attracting professionals to run the city will be harder if the reforms, on the November ballot as Measure L, fail, Scott said. San Bernardino has gone through four permanent and two interim city managers since 2012.

When Scott was hired on a one-year contract, he said he made it clear that he would take the job only if the city pushed for reform. Depending on how the vote goes, he may not return once his time is up in February, he said.

“I just know that going forward after bankruptcy we need to be able to show the stability that comes from a regular, council-manager form of government,” he said.

The case is In re San Bernardino, 12-bk-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

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