San Bernardino Prepares to Vote on a Plan of Debt Adjustment

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May 15, 2015
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Getting Ready to Rumble. San Bernardino yesterday made public its proposed plan of debt adjustment (San Bernardino Plan of Recovery) for consideration by the Mayor and Council to consider and vote upon Monday—a plan under which the city proposes to severely reduce post-retirement health care benefits, contract out for key municipal services, including fire and waste disposal, and cut by 99 percent what it will pay on its $50 million obligation to its pension obligation bondholders. Under the proposed plan, of the city’s ten classes of creditors, the draft plan proposes to make full payment to CalPERS and full payment where required by the state constitution. Notwithstanding the deep cuts in personnel already made, the draft plan proposes the elimination of an additional 250 positions, and continued deferral of $200 million in essential capital maintenance and replacement of fleet vehicles. Even then, the plan notes a structural deficit of more than $20 million would remain in the city’s general fund. According to the draft plan, about $51.7 million of the $357.9 million in potential labor savings for FY2015 through FY2034 have already been implemented through negotiations and mediation. The document reports that the city’s retirees have agreed to a settlement, under which they will pay more for retiree health care through moving to a separate healthcare plan—a move the document reports would save the city $370,000 annually beginning next year—and a change the president of the city’s retirees’ association told the San Bernardino Sun was worth it to ensure their pension benefits remained intact: “The immediate concern was the agreement that the city had with CalPERS…And the retiree association’s first priority was the preservation of our CalPERS benefits that have been earned by the retirees over the past several decades.” Under the draft plan, each of the eight groups of creditors proposed to be impaired would be entitled to vote to accept or reject the plan; nevertheless, the draft plan makes clear the city would seek to have U.S. Bankruptcy Judge Meredith Jury impose its proposed plan.
In his cover memorandum to the Mayor and Council, City Manager Allen Parker and City Attorney Gary Saenz wrote: “As the Recovery Plan makes clear, our first priority has to be the delivery of adequate municipal services…the pain will be shared among all stakeholders; employees, retirees, citizens (in the form of impaired service levels until the City can retain its footing) and capital market creditors. Only by undertaking the difficult process of refashioning the City into a modern municipal corporation can we be successful in creating a solvent future.”

The plan proposes to continue—or increase—the city’s pace of outsourcing some essential public services, to rewrite the city’s charter, as well as to continue to reduce the size of the city’s workforce, noting: “Contracting out of various services currently being provided ‘in house’ by the City is a keystone of this Plan…These include, but are not limited to, fire suppression, EMT services, and solid waste management collection/disposal.” Much of the outsourcing is proposed to begin this year, according to the draft 77-page recovery plan, including business license administration, fleet maintenance, and other services. With regard to the charter, the plan refers to the “interim charter agreement” under which city officials have already agreed to work, adding that the city expects the Council-appointed charter review committee to draft a proposed new charter and “place such proposed new Charter before the voters on the November 2016 ballot (or earlier if possible).” (In California, state law restricts proposed charter amendments to the November ballot in even-numbered years.) The forecast portion of the document forecasts that police and firefighters will continue to receive salary increases of 3 percent annually—an issue on which the city is mandated by its charter, in order to comply with the requirement to continue paying the average of what 10 like-sized cities pay for those positions. Salary compensation for non-safety employees is forecast to grow by 2 percent annually. Under the proposed plan, holders of $50 million in pension obligation bonds would receive an unsecured note and be paid based on a reduced principal of $500,000. Payments on that principal would begin in the sixth year after the Plan of Adjustment became effective. No payments would be made on bonds and certificates of participation issued in 1996 and 1999, respectively, for five years. Then, based on a new maturity date of 2035, only the interest would be paid for years six through 10, then interest and principal would be repaid through the term of the lease.

The City Council meets Monday to vote on the plan, which will be item six on its agenda: Resolution of the Mayor and Common Council of the City of San Bernardino Authorizing the Implementation of the City’s Fiscal Recovery Plan, the Filing of the Chapter 9 Plan of Adjustment and Disclosure Statement, and the Filing of Related Documents (#3853).
As San Bernardino City Attorney Gary Saenz earlier noted: “[The proposed plan] treats our citizens much better than our municipal bondholders…We expect our plan is going to provide for a substantial impairment of those (outside-the-city) groups, all for the purposes of increasing our service levels for our citizens. For each dollar we don’t pay our pension obligation bondholders, we will have a dollar to provide services.” Thus, Monday, San Bernardino elected leaders—much like their colleagues in Jefferson County, Alabama, and in Stockton—rather than a state-appointed emergency manager—will determine the fate of the proposed plan of debt adjustment—in an open and public forum―based upon a chaotic process of citizen and business impute, and strategic planning sessions by its elected leadership. There has been nothing pretty about municipal democracy, but a profound difference than preemption of local governance and accountability.

Governance Challenges. In the documents released by the city yesterday, one can appreciate the scope of the challenges—both in average per capita incomes, which mean the city has a significantly poorer tax base from which to meet mandates obligating it to pay salaries equivalent to those of its surrounding, higher per capita income jurisdictions. In addition, as the document notes, while the city’s new Charter created the position of city manager, an important step toward a council-manager form of government, the new Charter continued provisions which impede the city manager from exercising full responsibility and authority for effectively and efficiently delivering services throughout the entire city organization. Specifically, the new City Charter:

• Did not formally establish a council-manager form of government for the City of San Bernardino. Unlike many city charters, no form of government was specifically stated.

• Designated the Mayor as the chief executive officer of the City (strong Mayor), with responsibility for general supervision of the police chief and fire chief. While the city manager was designated to have day-to-day supervision of these functions, the new Charter did not achieve the objective of having a city manager position with full responsibility for managing the City.

• Maintained three separate departments under the administrative and operational direction of three advisory bodies (Component Boards) appointed by the Mayor and Common Council, not the city manager. The Mayor, however, lacks the authority to remove members from each of these boards. As a result, the water utility, library and civil service functions are not accountable to the municipal operation.

• Retained the authority of the Mayor and Common Council to appoint and remove department heads, division heads, and all unclassified City employees. Only classified employees within city manager-directed departments may be removed upon the recommendation of the city manager, without the additional required consent of the Mayor and Common Council. Due to contradictions within the Charter, it is unclear whether the city manager can remove department or division (classified employees) heads without the expressed consent of the Mayor and Common Council.

An Ill Wind in the Windy City. Following in the wake of Tuesday’s credit rating downgrade of Chicago, Standard & Poor’s yesterday dropped the city two steps (from an A+ to an A-)—and warned of possible further downgrades, but seemingly not because of any actions or inactions by the city, but rather because of the adverse fiscal impact of Moody’s downgrade, which, S&P warned, could inflict liquidity pressures on the city, in part because, under some current agreements Chicago has with some of its banking institutions, those banks could call or demand some $2.2 billion in debt repayments. S&P credit analyst Helen Samuelson noted; “The rating action reflects our view that the city’s efforts are challenged by short-term interference that prevents a solid and credible approach at this time…That said, we recognize that the city has a diverse tax base and a management team that has good policies in place,” adding that: “These are an important foundation for any city that needs to address the challenges that this city is facing.” S&P reported it expects Mayor Emanuel’s administration to address the city’s liquidity pressures, either by means of full re-negotiations or through utilizing its own internal liquidity – but warned that: “If the city does need to access its own internal liquidity, at levels we feel compromise its overall liquidity strength, this could lead to further downgrades.” The issue is that the Tuesday downgrade by Moody’s opened the door in a way that permits the city’s banks which provide credit or serve as interest-rate swap counterparties to demand repayment of $600 million in short-term credit lines, $1.1 billion in floating-rate debt and swaps, and $500 million in sewer or water related floating-rate paper and swaps. Although no such demands have been made, Chicago leaders maintain the city has the requisite liquidity and reserves necessary to cover the costs. Chicago CFO Lois Scott yesterday noted: “The city of Chicago’s financial crisis is real, urgent, and has been decades in the making…The downgrade by Moody’s of the city’s credit – a decision they say was driven by the Illinois Supreme Court’s reversal of the state pension reform bill – has substantially magnified the city’s challenges and will add real costs to Chicago’s taxpayers…Standard & Poor’s noted today that their own downgrade is driven by the short-term pressures on the city’s fiscal position that were created by Moody’s actions earlier this week. However, unlike Moody’s, S&P recognizes the City’s efforts to not only address its legacy liabilities, but that it has the right tools in place to address the challenges it faces.”

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