San Bernardino, California has filed a chapter 9 bankruptcy. This makes three chapter 9 filings of California municipalities in the last three weeks (Stockton also filed due to endemic financial challenges, while Mammoth Lakes was forced to file due to a $43 million legal judgment).
Only 18 months ago many experts proclaimed that the taboo of a chapter 9 filing was such that only the truly desperate would seek the protection of bankruptcy court. Either those experts were wrong or the ranks of the desperate among U.S. municipalities were severely under-estimated.
The particulars of San Bernardino’s case are depressingly familiar:
- Declining Revenues. Tax revenues have dropped by as much as $16 million a year in recent years, due to drops in sales and property tax collections.
- Failed Efforts at Cost-Cutting. To the city’s credit, the municipal workforce had already been reduced by 20 per cent, and concessions of $10 million had been negotiated.
- Weak Financial Reporting and Controls. Apparently city managers were victims of budget officials who painted an overly rosy financial picture over much of the last 20 years.
The depth of San Bernardino’s troubles was highlighted by the observation of Councilwoman Wendy McCammack that the elimination of all government services with the exception of the police department would not have been sufficient to balance the city’s budget.
The chapter 9 taboo is broken. As I have been saying for over a year and a half, and as retirees, bondholders and municipal employees nationwide are now learning to their chagrin, when municipal leaders are faced with the choice of implementing draconian cuts in government services or reneging on financial commitments, they will choose the latter en masse.
Government does not exist for the purpose of honouring prior obligations. Rather, it is a creation of citizens meant to provide necessary services. As a nation the U.S. is entering a period in which increasing numbers of municipalities will find their finances at the breaking point. Difficult choices will be made, and there are no right answers.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies, real estate investors and municipalities. He can be reached at 312-505-7238 or at [email protected].