Cities on the Brink

Municipal finance chiefs are fighting to keep their troubled cities solvent. Sometimes it’s a losing battle.

Beating Back Bankruptcy
How some financially challenged cities avoided Chapter 9

Overwhelmed by huge budget deficits when the recession struck, cities like San Francisco, San Jose, Calif., and Joliet, Ill., looked bankruptcy in the eye and passed on the opportunity, preferring to find other ways of addressing their ongoing financial liabilities and declining tax revenues.

So did San Bernardino County, despite being the home of the city of San Bernardino, which filed for Chapter 9 protection in August 2012. “We faced many of the same issues other municipalities faced, chief among them a three-year, 12 percent decline in our assessed property values after the housing crisis reared in 2007,” says Gary McBride, the California county’s CFO. “Those tax dollars are our primary discretionary revenue source. At the same time, our sales-tax declines were brutal, down 24 percent over that same three-year period. Together, they decimated the budget.”

13Oct_Cities_SanBernardinoIf these injuries weren’t bad enough, the county’s pension fund bled dollars in the recessionary environment, migrating from fully funded status in 2007 to 64 percent funded two years later — a $2 billion shortfall on a market-value basis.

Four hundred miles north, San Francisco had its own troubles. “From peak to trough in housing prices, we lost 10 to 20 percent in values, less than other California cities but still nothing to laugh at,” says controller Ben Rosenfield. “We posted operating-budget gaps in each of the first five years of the recession, and continue to face structural budget challenges ahead. Our pensions, which cover 90 percent of city workers, suffered significant losses in 2008, requiring a 20 percent rise in contributions.”

San Jose also took a punch to the gut: 10 straight years of budget deficits through 2013. City leaders were forced to continually cut services, shrink the workforce, close libraries and community centers and ask everyone from the mayor on down to take pay cuts. In fiscal year 2011-12, the budget gap was an eye-opening $100 million, for a general fund that typically runs about $900 million. “Our expenses skyrocketed from $72 million to $277 million in the course of a decade [through 2013],” says mayor Chuck Reed.

13Oct_Cities_JolietJolting Joliet
Joliet, a former Rust Belt city that hit bottom in the 1980s when many of its industrial facilities folded but rebounded following the advent of riverboat gaming in the 1990s, has again fallen on hard times. “Until 2008, money wasn’t an issue here, and we paid cash for everything — a $30 million baseball stadium, $10 million water park, and new police and fire stations,” says Rachel Mayer, the city’s finance director. “Then the recession struck and our two major revenue streams — gaming tax and taxes on housing starts — dropped dramatically.”

3 thoughts on “Cities on the Brink

  1. I was the city manager in 2008 that recommended BK for Vallejo. We had no choice; the city ran out of money to pay for union contracts. The city labor unions were stupid and they could not comprehend the math involved in operating a city.

    Basically, the math goes something like this: The fire union charged their members $175.00 month x 12 months/year x 100 fire fighters x 2 ( election cycle every 2 years) = $410,000. Police union charged $125 per month x 12 months/year x 145 cops x 2 years (election cycle once every two years) = $435,000. Together these two unions bought their elected Council members every 2 years since they financed the local elections by the tune of $$845,000 for every election. No one could compete with the fund raising. They controlled the City Council, their own contracts and the rest of the city too. Hence, their contracts were not sustainable and bankruptcy was the result. The Fire and Police union cooked their own “petard” as the saying goes.

  2. A couple of comments related to the County of San Bernardino: the County did not borrow $37M to help solve its budget problem, it actually prepaid $37M in debt using one-time funds to generate ongoing savings to help bring the budget in line. Second, the County is moving away from cafeteria style benefit plans, which are pensionable in our system and thus cost substantially more.

    These types of actions, combined with cooperation from employee bargaining groups and an elected Board willing to make difficult financial decisions in a timely manner have allowed the County to continue to adopt structurally balanced budgets throughout the economic downturn.


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