In this morning’s eBlog, we explore the key steps underway in San Bernardino to restore the city’s critical property tax base—an essential element not just to approval by U.S. Bankruptcy Judge Meredith Jury of the city’s pending plan of debt adjustment, but also for any meaningful, long-term fiscal recovery. Then we turn to the very different kind of federal role in Opa-locka, Florida—already under a state takeover, but now under the impatient eyes of the federal Securities and Exchange Commission.
Restoring a Municipal Tax Base. The City of San Bernardino, once the key gateway from the East and Midwest to Los Angeles basin and former home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—but today in chapter 9 municipal bankruptcy longer than any other city in U.S. history, is experiencing returns from its efforts to revitalize its property tax base—a base that was devastated in the Great Recession—which left the municipality with nearly 50 percent of its residents on some form of public assistance and 56 percent of homes underwater: it reduced property tax revenues by 15 percent. In the years leading up to bankruptcy, San Bernardino suffered heavily as important sources of revenue fell, notably property taxes: the San Bernardino FY2006-2008 CAFR reports show that property taxes generally accounted for about 30% of the city’s total revenue, but the Great Recession demonstrated that reliance on property tax revenues can be volatile. In the case of San Bernardino, the city had experienced a huge housing boom from 2001-2007, and a consequent growth in property tax revenues; but what goes up can come down, so the city was one which was especially hard hit when the housing market crashed. While home prices around the country fell by 24% from 2005 to 2010, they fell by over double that in San Bernardino, which also experienced a foreclosure rate around almost four times the national average. From 2008 to 2011, property tax revenue fell from $74.7 million to $46.7 million, a steep 37% decrease. Meanwhile, adding fiscal insult to injury, the state’s Proposition 13 barred San Bernardino and all California cities from attempting to make up this lost revenue through increased property tax rates. The 1978 constitutional amendment pegs the statewide property tax rate to 1 percent of a property’s assessed value at the time Prop 13 was enacted or the sale price when the property changes hands. Annual increases of assessed value are limited to 2 percent in the years the property is not sold. Therefore, unsurprisingly, focusing on vacant and heavily vandalized houses has been a critical component of the city’s focus on a turnaround and exit from municipal bankruptcy—and the city’s program: RENU, or the Receivership Empowering Neighborhood Upkeep, which it initiated a year ago in April 2015, and is now seeking to expand. San Bernardino has now completed the first project, and funds from the sale of the property—which involve the court taking control of a property where the owner is unresponsive and appointing a receiver to fix it up—is then used to reimburse the receiver, the city, and others involved in the process, so that there is no cost to the city. From June 2011 to August 2015, the city issued 14 notices and several times secured the property where yesterday’s open house was held, with Deputy City Attorney Lauren Daniels noting the house had gone into foreclosure and become bank-owned: “We sent countless notices to the holder of the mortgage and trust, because there were issues of squatters, and schoolchildren at Serrano (Middle School) were nearby and they would come to the house…With the hazardous swimming pool, hazardous pieces of the ceiling coming off — there were numerous code violations.” The result: one year after the first San Bernardino house completed the receivership process, neighbors say it is still making a world of difference—or as one neighbor yesterday described it: “Peace and safety has been restored to our neighborhood, because of what the city did to our neighborhood. It’s a very, very good program.”
Unlocking a Municipality’s Fisc. The small Florida municipality of Opa-locka, which Florida Gov. Rick Scott declared on the first of this month to be in a state of financial emergency, now is also under investigation by the Securities and Exchange Commission, with the SEC requesting documents and emails relating to municipal bonds the city issued for the May 2015 purchase of an $8 million building. The federal probe came as Melinda Miguel, Florida’s Inspector General, whom Gov. Scott named to take responsibility for state fiscal oversight, convening her panel for its first meeting yesterday—and at which Acting City Manager Yvette Harrell, in giving the state financial emergency board an overview of the city’s finances, described Opa-locka’s fiscal situation as “dire,” noting: “We have an important job here to do.” That is a task, no doubt, made more difficult, because it marks the second state fiscal takeover of the municipality—so one key task will be to determine in what ways the first state takeover failed to produce long-term fiscal stability. In her presentation yesterday, Ms. Harrell told the state board of recently discovered information which appears to demonstrate that the city failed to budget a “$1.7 million prior debt obligation required to keep the city moving.” Ms. Harrell added that Opa-locka had: failed to budget extra money for staff it hired; that the city continued to budget and spend revenues it would not receive even though property values declined; and that the cash-flow deficit has fluctuated wildly, from $1.42 million to $4.5 million to $1.89 million in a matter of weeks—adding that the city needed help to “figure out where we are.” She noted that some key steps would involve enhancing efforts to collect past-due bills, although, with the city inside Miami-Dade County, a county with its own experience once on the brink of municipal bankruptcy, but today experiencing a booming economy and rapidly rising property values, a critical issue for Opa-locka is to get a handle on why it has been experiencing a consistent decrease in property values by as much as 60 percent.
For her part, IG Miguel named appointees to committees to examine different aspects of the city’s budgets and contracts, as she presses to meet an August 1st deadline for the board to submit a financial plan to Governor Scott—a task no doubt made even more challenging since Opa-locka has yet to begin work on its 2015 audit. Thus, unsurprisingly, questions were raised during the financial board meeting about the need to hire a new, independent auditor. The city had total long-term debt outstanding of $11.6 million, including $6.56 million of revenue bonds placed with a financial institution and state loans, according to its most recent, FY2014 audit. A financial assessment conducted by Miami-Dade County Auditor Cathy Jackson earlier this year found that as the city’s fiscal crisis had worsened, there were numerous irregularities with the city’s use of restricted funds, including debt service reserves—reserves which the Miami Herald last week reported the city had dipped into to cover payroll expenses—a disclosure which the city manager yesterday omitted to inform the financial emergency board.