Municipal Bankruptcy Watch: San Bernardino

San Bernardino, California, a city of more than 200,000 people located 60 some-odd miles east of Los Angeles, the county seat of San Bernardino County, and the capital city of what has been optimistically called the “Inland Empire” has become the third California city in two weeks to declare its intention to file bankruptcy:

(Reuters) – The city council of San Bernardino, California, voted on Tuesday to file for bankruptcy, marking the third time in recent weeks a city in the most populous U.S. state has opted to seek protection from its creditors.

The decision by the leaders of San Bernardino, a city of about 210,000 residents approximately 65 miles (104 km) east of Los Angeles, followed a report by city staff that said the city faced an imminent financial crisis.

The report said the city had exhausted its reserves and projected that spending would exceed revenue by $45 million in the current fiscal year which started on July 1.

According to media reports, the city attorney general James Penman said San Bernardino’s city officials had been submitting false accounting documents for 13 of the last 16 years in an effort to hide the real financial situation of the city.

Like Stockton and Scranton, San Bernardino’s problem is not that its revenues had declined. It is that its expenses, mostly its employee wages and benefits, had increased so much faster than its revenues.

Chapter 9, Title 11 of the U. S. Code governs municipal bankruptcies. Prior to its enactment in 1937 the only recourse that creditors of a city that was unable to pay its bills had was to seek relief from the courts and pursue an action of mandamus to compel the city to raise taxes to pay its bills. The new provision gave cities and certain other entities the alternative of pursuing an orderly reorganization of its finances.

Between the time the law was enacted in 1937 and 2008 roughly 600 municipal bankruptcies had taken place. Since 2008 there have been between 40 and 50 and, clearly, more are to come. A number of other California cities are frequently mentioned among the likely candidates for bankruptcy including Santa Ana, Long Beach, Costa Mesa, and even such major players as San Diego and Los Angeles.

In 22 states, e.g. Georgia, Rhode Island until very recently, state law prohibits cities from declaring bankruptcy. 16 require cities to petition the state to allow them to declare bankruptcy. I believe that’s the case in Illinois. 12 states including California, Florida, and Texas provide blanket authorization for cities to declare bankruptcy.

In December 2010 analyst Meredith Whitney appeared on CBS’s 60 Minutes and warned that between 50 and 100 substantial municipal bankruptcies would occur within the next few years. That prediction was much derided by other analysts. As it turns out she may have been on to something. 2011 saw 13 municipal bankruptcies, the most in many years, and by my reckoning 2012 has already seen 10. This could become the biggest story of 2012, bigger even than the presidential election. I plan to keep track of it.

California cities appear to be in a sort of deadly embrace or suicide pact. Wages for police officers, firefighters, and so on in one city are frequently pegged to those in neighboring cities. This makes sense after a fashion. They are, after all, in some degree of competition with each other for these workers. When things are going well this pushes public employee wages up in lock step but one city declaring bankruptcy may well move others to follow its example. We’ll see.