The San Bernardino City Council has voted to enter bankruptcy proceedings, due in part to soaring pension costs.
(July 11, 2012) — The City of San Bernardino will file for bankruptcy, as mounting financial problems that have been exacerbated by growing pension costs have left it with dry coffers.
Facing a $45 million budget shortfall, officials feared that the city of 209,000 would be unable to pay its August 15 payroll for municipal employees. As a result, the city council late Tuesday night voted 4-2 to file under Chapter 9 of US bankruptcy law.
“The city’s reserves and discretionary funds have been depleted, and [now it] faces insolvency,” said a June 26 budget analysis by the municipality. “Simply put, the city must now take substantial action to reduce its spending and increase revenues.” The report fingered erroneous accounting, deficit spending, the poor local economy, and pension and debt costs as the key drivers of the budgetary shortfall.
According to the June 26 budget report, “The major cost drivers for the city’s General Fund are compensation and retirement costs.” It noted that San Bernardino’s costs for employee retirement almost doubled from fiscal year (FY) 2006/07 to FY 2011/12. In budget terms, this meant that retirement costs made up 9% of the city’s General Fund in FY 2006/07 and rose to 13% in FY 2011/12. Costs were expected to continue to grow in the coming years.
The California Public Employees Retirement System manages San Bernardino’s pension money, but the city is obliged to pay the system’s costs for the majority of its employees. Furthermore, like many other municipalities, San Bernardino issued pension obligation bonds almost a decade ago to cover pension commitments. While the move offered short-term relief, the bill for that debt is coming due. The city now spends $3.5 million annually on those pension obligation bonds and expects to pay $6 million in FY 2021/22.
“The financial situation in 2012 is a systemic problem held over for years going back into the 1990’s,” concludes the report. “Revenues are simply not sufficient to cover the cost of the services being provided.” After Stockton, which entered bankruptcy in late June, San Bernardino will be the second largest California city to file for Chapter 9.
In its latest issue, aiCIO profiled the San Bernardino County Employees’ Retirement Association (SBCERA) and how its gifted leadership manages to make the best from a bad situation. To read the article, click here.