Salaries, mistakes slammed San Bernardino into bankruptcy

July 20, 2012

By Tori Richards

SAN BERNARDINO — The bankrupt city of San Bernardino has displayed its shortcomings in a 54-page report that outlines myriad areas where ineptitude has placed them in a position where they cannot meet payroll next month.

On Jul;y 18. city council members received a report titled, “Budgetary Analysis and Recommendations for Budget Stabilization,” a primer of sorts that outlines various city departments where cost cutting moves could be made.

“This problem has been coming for a long, long time,” Councilman Fred Shorett said during the meeting. “[But] we’re here now. Any kind of wrongdoing — which I do not believe — that will come up as well. This bankruptcy has fallen on our watch. We own it and we are responsible now to fix it and stop the finger-pointing.”

The council voted to declare a fiscal emergency and file for bankruptcy in order to stave off a $46 million deficit that has left the city so poor it cannot even pay for an expert witness in a lawsuit against the police department.

Due to accounting errors, city officials believed they had more money than was actually in the coffers. In fiscal year 2010-11, the reported balance was $1.7 million, when it was actually only $410,293. And the following fiscal year, the reported balance was $2 million, when it was really minus $1.18 million, according to the report.

Even with the imminent bankruptcy filing, the city still has to pare down expenditures so it can function in the near future. The report shows numerous areas where the city has been living a lifestyle that was well beyond its means.

Personnel

The biggest investment any municipality makes is its work force and San Bernardino is no exception. However, some of its policies have created this debacle, said UCLA economics professor Lee E. Ohanian, who is also a senior fellow at the Hoover Institution at Stanford University.

“Unfortunately, it’s not all that surprising,” Ohanian said. “You tend to see some small cities and other municipalities make bad financial decisions, some of which may reflect inexperience on the part of city leaders and some of which is not enough checks and balances on city budgets.”

The city has laid off more than 250 people in the last three years. However, personnel costs continue to rise as the existing employees work overtime to keep up with the workload; and pensions continue to rise.

The 2011-12 fiscal year has $102 million budgeted for personnel expenses. That number is expected to increase $10 million a year, the report said. Labor is 73 percent of the general fund. Public safety comprises 79 percent of the entire general fund personnel expenditures, the report said.

Among the items discussed on the report:

* For most of the employees, the city has paid their entire pension. As of October 2011, new hires have been paying a share. However, the city should negotiate with current employees to have them pay a share, such as Newport Beach’s new 50/50 cost sharing policy. San Bernardino’s employee rate is 8 or 9 percent, depending on the job classification.
* Most employees are at the top of their salary range because some labor groups have just five or six pay-raise levels. “Consequently, it takes only three and a half to four years for the employee to get to the top step,” the report said. Some employees have received raises of 8 or 9 percent annually their first few years. A 10-15 step range would be more cost effective.
* Part-time or contract employees should be used.

Operations

Other areas could run more efficiently, the report said. Among the propositions are contracting out the fire department, 911 system and animal control to the county of San Bernardino.

Additionally:

* Strengthen collections for code enforcement, false alarm fees and paramedic subscriptions. The latter is currently $24 a year, which is half of the regional average.
* Increase property transfer taxes to levels consistent with other cities.
* Impose a tax on utility services not currently taxed: sewer service and trash collection.
* Sell surplus city-owned land parcels to generate tax revenue.
* Consider having civilians teach police training classes rather than sworn personnel.

The report recommended that city officials not try to increase the sales tax or raise taxes on hotel beds.

Professor Ohanian said city officials need to look at their geographic area and realize that they can’t view their budget as if they were living in Newport Beach or Beverly Hills.

“If everybody is making a six-figure salary, when a lot of people in private sector aren’t making that, it’s not good,” he said.

He also surmised that the lack of competition for services means that city officials don’t have a true idea of what something costs.

“For example, with some cities there is a competition for refuse contracts,” Ohanian said. “The city then gets a sense of what it costs for trash pickup on a regular basis. They should be looking around and saying, ‘What would it cost us to competitively hire people?’ That is the place where cities invariable get in trouble and tend to overpay. Not only in salaries and services, but pensions. I don’t know who they are comparing themselves to, but it shouldn’t be Beverly Hills.”

The council members admitted that mistakes have been made and noted a need for transparency, something that has not existed in the past. And the bankruptcy proceedings themselves will lay bare all contracts and expenditures.

“Communicating early, transparently and frequently about proposed changes, as well as why the changes are important, is an essential part of effective change management,” the report said, under the heading, “COMMUMICATIONS AND TRANSPARENCY.”

With the cost of labor clearly not keeping pace with unemployment that is 5 percentage points higher than the state average, and a housing market that is also at the bottom of the state, Ohanian questioned the reason behind approving such contracts.

He asked, “How much of this involves honest mistakes vs. just wanting to keep people happy? The way to get around this is voters become better informed and demand to understand to see these contracts.”