BY IMRAN GHORI, JEFF HORSEMAN AND DUG BEGLEY
STAFF WRITERS
ighori@pe.com

Published: 11 July 2012 07:02 PM

San Bernardino has faced financial difficulties for years but it wasn’t until a couple of weeks ago that city officials realized how bad the problem was, Mayor Pat Morris said.

A new interim city manager and finance director took over in April and they began reviewing the city’s past budgets and projected future revenues and expenditures.

“It became apparent to them we had a serious, cash-flow problem and that it was a dire circumstance,” Morris said.

Among the problems discovered were accounting errors made during the past three years that overestimated the city’s ending budget balance – the money that it carries forward into the new fiscal year – by $3 million for 2011-2012.

City administrators on Tuesday recommended filing for Chapter 9 bankruptcy protection, warning that it was the city’s best option to deal with an immediate cash-flow shortage in which it might not be able to make next month’s payroll and pay vendors.

Officials calculated that it would cost $166 million to continue city operations through this fiscal year, but revenues were projected at about $120 million.

So, with the city facing a budget deficit of at least $45 million, the council followed administrators’ advice and voted for bankruptcy.

“It is a dark day for our city,” Morris said.

NEXT STEP

The council will discuss the next steps in the bankruptcy process at its Monday meeting where it may also declare a fiscal emergency, City Attorney James Penman said. The process could take some time and will require outside lawyers, he said.

The City Council still would retain decision-making authority, but a bankruptcy court judge must approve the city’s plan for solving its financial problems, Morris said.

Franklin Adams, an attorney and partner in the business services practice group of the Riverside law firm Best Best & Krieger, said legally, San Bernardino will have to prove it is insolvent, meaning it can’t pay its bills as they come due.

Creditors, including public employee groups, could challenge the insolvency claim, Adams said.

When the northern California city of Vallejo declared bankruptcy in 2008, its public employee unions contended that the city had pots of money to pay expense, he pointed out. A judge eventually declared Vallejo insolvent.

San Bernardino also will have to prove it tried to negotiate with its creditors in good faith, or if it didn’t, that those talks wouldn’t have been fruitful, Adams said. It’s not clear whether the city has started working with creditors.

Later on, San Bernardino will have to predict its future revenues and align them with its obligations to creditors and the cost of providing public services, Adams said. Creditors will examine that plan and could find faults with it, he added.

How long the whole process takes depends on the city’s and creditors’ ability and willingness to settle, Adams said.

BUDGETS QUESTIONED

City officials have offered myriad reasons for San Bernardino’s problems. They include steep declines in property and sales tax revenues, last year’s state raid on redevelopment funds and rising pension costs. Some city officials also pointed the finger at pet projects favored by Morris and made allegations of falsified budgets.

At the Tuesday council meeting, Penman said that the council was given false financial information in 13 budgets over the last 16 years, claiming it was in the black when it was in the red. He remained vague about the charges at a Wednesday afternoon press conference.

Penman, the mayor’s frequent political opponent, said he believed city officials, including the mayor and council, were unaware of the dire financial straits until early July.

Morris said he’s not sure what Penman’s source for that information is and said he’s seen no reports to suggest there were any deliberate attempts to falsify budgets.

“I heard that and I was stunned,” Morris said. “I heard that for the first time (Tuesday) night.”

In contrast to what Penman said, Morris said the city has had budget deficits for 13 years over the last 16 years and those were all reflected in city documents.

“The city has been on the ledge for a long, long time,” Morris said.

Councilwoman Wendy McCammack blamed the mayor for what she called spending on nonessential services in preceding years, such as a rapid transit line under construction and a downtown movie theater that opened last week.

“Some of us for years have been concerned about excessive spending on nonessentials,” she said.

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