Economy
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San Bernardino blues: Bankrupt city flailing amid financial overhaul

California municipality embracing new development projects, despite major problems cutting public pension benefits

SAN BERNARDINO, Calif. — A loan and pawnshop business and empty storefronts line D Street, the five-lane artery leading to City Hall. Nearby, a Radisson Hotel and the adjoining San Bernardino Convention and Visitors Bureau stand empty, both shuttered for a few years.

On a recent afternoon, a young woman at a bus stop repeatedly shouted out across the lightly traveled road, “Can I have 40 cents?” An elderly woman pulling a cart asked passersby to spare a dollar.

There is no thriving downtown in this Southern California city, which has the dubious title of being the poorest of its size in the state. There hasn’t been one in years, but the dismal state of the city’s core is a constant reminder of a larger problem. San Bernardino, the state’s 17th-largest city, with almost 214,000 residents, is bankrupt.

It’s been a little over two years since San Bernardino filed for Chapter 9 bankruptcy, which gives the city protection from creditors while it reorganizes to make the city solvent. The process has been brutal, especially with a city charter provision that makes it difficult to negotiate lower benefits for police and firefighters. The city was projecting a $45 million deficit when it sought refuge in bankruptcy.

“We’re mediating with our major creditors to agree to payments at reduced rates,” said city attorney Gary Saenz.

The city is now considering raising its 8.25 percent sales tax, which is already higher than the state average, and instituting development impact and franchise fees.

‘We’re mediating with our major creditors to agree to payments at reduced rates.’

Gary Saenz

attorney for San Bernardino

And in a move that has garnered national attention, San Bernardino is considering allowing medical marijuana dispensaries. The operations are currently banned here but are allowed in 40 other California cities.

“The effort to shut them down has been unsuccessful,” said Mayor Carey Davis, who said the move could help crack down on illegal operations and raise revenue to beef up enforcement. “We need to restrategize how we deal with that problem.” The current ban isn’t working, and the illegal operations are bringing crime and nuisance complaints from residents, he said.

“We shut them down, and they reopen two to three blocks away,” said Saenz, who estimates that there are 20 to 30 illegal pot shops operating at any given time in the city.

“The city is merely exploring what are some of the options to be able to manage marijuana dispensaries,” said Davis, a career accountant who speaks in a quiet and deliberate tone. “Some cities have complete bans. Others limit and highly regulate it.”

City officials are soon heading to Palm Springs, which has regulated dispensaries, to meet with their counterparts there and learn from their experience.

Bigger problems loom

But it is unlikely pot will provide anything more than light relief for the city’s financial straits. Because of court challenges by CalPERS (California Public Employees’ Retirement System), the powerful state agency that runs the nation’s largest public pension system, and continued negotiations with the firefighters’ union, a final restructuring plan may not be submitted to the bankruptcy court for another year.

Davis, who took office after the bankruptcy filing, said San Bernardino’s downturn was the result of an unfortunate combination of the Great Recession, state laws and decisions made by former city leaders. One of the villains in the city’s fight to get back on its feet is Section 186 of the city charter. In place since 1955, it guarantees that police and firefighters be paid the average of what other similar-size cities pay. San Bernardino voters will decide this fall if the charter should be amended to set pay through collective bargaining, as it is for other city workers.

Other California cities, such as Stockton and Vallejo, have filed for bankruptcy, but San Bernardino is “the only city in California that has a charter mandate,” Saenz said.

The city has reached a tentative agreement — ordered confidential by the courts — with police, but talks with firefighters are ongoing. According to Corey Glave, a lawyer for the San Bernardino City Professional Firefighters, the city is proposing over 40 percent in pay and benefit cuts.

“That’s completely unreasonable,” he said, adding that the city is losing law enforcement and firefighting personnel to other communities. “The new plan would close one [fire station] right now and have a rolling brownout of one or two more.”

Now, he said, firefighters are handling more calls with fewer employees. “You can’t just ignore the calls that come in to the station,” Glave said.

The California challenge

City bankruptcies are rare. There have been only 63 since 1954, compared with 1.3 million business bankruptcies in the 12 months ending September 2012, according to Frank Shafroth, director of the Center for State and Local Leadership at George Mason University in Fairfax, Virginia.

But if a financially strapped city needs bankruptcy court protection to get its financial bearings, California may be the toughest place to do it. “In other places, pensions and post-retirement benefits are part of the municipality,” Shafroth said. “In California, it’s different because the public pension system is run by CalPERS and they’re fighting to say, ‘No, you can’t reduce what you owe us by a dime.’”

The court decision that everyone is awaiting is whether federal bankruptcy law can trump the state constitution. The city stopped making pension payments when it filed for bankruptcy but resumed them a few months later. While CalPERS wants to be repaid in full, the city is fighting for partial repayment. The battle is less over the amount of money in question than over the precedent it would set if San Bernardino escaped full repayment. Could cities then avoid paying into their pension systems by filing for bankruptcy?

“The California constitution says they can’t breach a contract,” said Shafroth, a former director of federal relations for the National League of Cities. “The issue goes to the larger question, Can pensions or health care retirement benefits be reduced? There are a lot of closed-door negotiations, and maybe something will be worked out.”

An e-mail statement from CalPERS public affairs read, “As you may be aware, San Bernardino resumed paying their pension contributions in July of last year. The judge in the case also ordered mediation. The mediation discussion is strictly confidential, but the mediator has authorized us to state that the city and CalPERS have reached an agreement regarding various items that will help form the basis for the city’s plan of adjustment. The details of the agreement must remain confidential.”

‘The California constitution says they can’t breach a contract. The issue goes to the larger question, Can pensions or health care retirement benefits be reduced? There are a lot of closed-door negotiations, and maybe something will be worked out.’

Frank Shafroth

director, Center for State and Local Leadership

In Detroit, another city in bankruptcy, a federal judge ruled that federal laws trump state laws and that benefits to Detroit city workers may be cut.

San Bernardino suffered another blow when California Gov. Jerry Brown dismantled community redevelopment agencies in 2011. Before then, any tax receipts beyond what the developed parcel already had been generating would stay with the agency to pay off bonds and invest in new projects.

“They were mainly controlled by city officials,” said Kim Rueben, director of the Urban Institute’s state and local finance initiative. “When you had a lot of growth going on, you formed a redevelopment agency, and that means you were keeping more of the property taxes.”

During the housing boom last decade, cities such as San Bernardino were counting on greater revenues. “If you made promises to public-sector employees based on the assumption that you were going to take this growth and capture added value from property taxes, it became kind of tough,” she said. “It isn’t surprising to me that it’s taken a while to get out of bankruptcy. They don’t really have good options.”

It became especially tough after the housing bust, when development screeched to a halt and the foreclosure crisis dried up revenue from real estate. “It immediately took away a lot of revenues,” Shafroth said. “It was there one day, and then it wasn’t there. That’s a double whammy.”

Community activist
Anthony Victoria, who is active in San Bernardino Generation Now.
Fabian Torres

In the meantime, the budget slashing continues.

Some 500 city employees, about a third of the city’s payroll, have been laid off. About 100 police officers lost their jobs, trimming the force to 248. Some public pools didn’t open this summer. Park maintenance, including mowing and watering, is now in the hands of private contractors. Libraries lost four positions.

“The bankruptcy, if anything, has helped maintain city services,” Davis said, by easing debt payments.

What the city will spend money on is a new redevelopment guru to attract business investment to an area that turned the former Norton Air Force Base into the San Bernardino International Airport — an airport with a spanking-new passenger terminal to handle flights but, so far, no scheduled service from any airline.

Davis said there are opportunities, with the city breaking ground recently on an interregional transit hub for bus and rail. But others disagree.

“I don’t see a whole lot of positive,” said Richard Castro, 57, a retired high school science teacher who ran for mayor last year and lost. “It’s tough to get kids to push forward. There’s been more of an exodus.”

Unemployment is at 9 percent in San Bernardino County — much higher than the national rate of 6.2 percent. In the San Bernardino–Riverside metropolitan area, unemployment went as high as 15 percent, and foreclosures peaked at 8.8 percent in 2009, four times the national average.

And the crime rate is high. The website Neighborhood Scout gives San Bernardino a crime index rating of 4, meaning that it’s safer than only 4 percent of other U.S. cities. It says a person’s chance of becoming a victim of violent crime here is 1 in 95 — considerably greater than the 1 in 236 chance statewide. The city was shaken up this month by the shooting of a police officer who was critically injured. Three men were charged with attempted murder.

“It’s beyond fed up,” Castro said of the feelings that many city residents have. “It’s hopeless. We see no sign of a different future.”

A glimmer of hope

There is a movement afoot led by younger San Bernardino residents to re-energize the city.

Anthony Victoria, 23, grew up in nearby Rialto and now studies history at the University of California Riverside. He’s also contributing writer at Inland Empire Community Newspapers, covering community events, and is active in San Bernardino Generation Now.

“We’re a group of young adults ages 18 to 30 who want to make changes in the community,” Victoria said. “We’re frustrated with everything that’s been happening with the bankruptcy and we’re taking it upon ourselves to engage the community.”

The group organizes downtown festivals and forums to galvanize residents. This Labor Day weekend, the Downtown Summer Festival will bring music, food, art and non-profit groups to the Court Street Square. “In the past few years, there hasn’t been a whole lot of engagement with the community,” Victoria said. “The new mayor, although he doesn’t have prior experience with politics, I think he’s doing a fairly decent job to try to get through the bankruptcy and get through the charter reform.”

Generation Now is launching voter registration drives. “Out of 78,000 registered voters, only 14.4 percent made it out” in last year’s mayoral race, he said. The number of registered voters aged 18 to 29 rose 23 percent since 2009, the previous mayoral election, while overall registration rose only percent.

“We try to encourage our young residents to register. As young people, we kind of want to go outside and leave our area. I feel we can’t do that anymore. We try to find ways to encourage people to stay in San Bernardino and spark that rejuvenation that we need.”

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