Fiscal Chaos & Municipal Bankruptcy

Columbus Day, 2015

Fiscal Chaos and Municipal Bankruptcy. In the wake of U.S. Bankruptcy Judge Meredith Jury warning last week that the bankrupt City of San Bernardino will have to produce much more extensive fiscal information for the federal court if it is to demonstrate its commitment avoid insolvency and emerge from municipal bankruptcy, the city’s inability to even complete two long overdue audits of the municipality’s finances appears to be still another ominous omen. But, at a hearing last week, Mayor Carey Davis reported that city staff was reviewing a draft of the audit for FY2012-13, adding that a post-election public presentation of said audit in November would not be “not unrealistic.” Mayor Davis noted that citizens and city taxpayers might even expect a second audit relatively soon after that. However, any such bright promises appeared to be belied by the tabling of a scheduled discussion of the audits at the hearing—a tabling without explanation — a tabling, moreover, which led Councilman John Valdivia to accuse the Mayor and majority of the Council of “shutting out the public,” even as City Attorney Gary Saenz advised Councilmember Valdivia that such comments were not allowed once a tabling motion had been made. The resulting confusion could hardly be a sign to U.S. Bankruptcy Judge Meredith Jury that this is a city intensely focused on getting itself shipshape—or even serious about its responsibility to its own taxpayers and citizens—notwithstanding Mayor Davis’ follow-up statement that “[T]he responsibility rests with me…I take responsibility (for) the need to garner support from the (City) Council and also to have the city function at a higher level. The Finance Department is just one of our departments that had an exodus of personnel in August 2012, after the bankruptcy filing.”

Fiscal Incompetence? The city’s trail of auditing failures dates back to its 2012-13 fiscal year, that is, the municipal fiscal year prior to its filing for municipal bankruptcy in what has now stretched to the longest municipal bankruptcy ever—and one that appears to be regressing, rather than advancing. Moreover, the inability to complete the older audit has meant the rail cars of successive audits are now backed up, even as the kinds of fiscal reports requisite to the city’s plan of debt adjustment due to Judge Jury falls further and further behind. The fiscal reporting failures not only affect its fiscal credibility, but also its budget: the California Employment Development Department (EDD), one year ago, halted funding to the city’s Employment and Training Agency because of the city’s failure to complete the city’s single audit report for the 2012-13 year, a cutoff which triggered city make-up expenditures of $125,000 a month—funds which a bankrupt city can ill afford, with the state agency noting the cutoff came only in the wake of a series of warnings and deadlines, including a final notice from Dennis Petrie, deputy director of the Workforce Service Branch of the California Employment Development Department: “While we are certainly aware of the challenges faced by the city as a result of its bankruptcy filing, the EDD has a fiduciary responsibility to take this action until such time that the city fulfills its legal obligations by filing the delinquent report.” Unsurprisingly, the seeming incompetence has become a factor in the next month’s municipal elections—or, as candidate Scott Beard at a candidate forum last Thursday night put it: “I think we all suffer from the frustration of not knowing where the money is.”

One might reasonably ask not just where, but also how much: the audits, to be produced by Macias Gini & O’Connell, or MGO, which also does audits for CalPERS, have come at a steep price: last March the City Council agreed to pay MGO another $490,000 — or more than double the firm’s original cost estimate. The increasing tab for what appears to be non-performance are, no doubt, further complicated by the auditing firm’s apprehensions that it will never, as a bankruptcy creditor, receive what the city has promised to pay. But, with the nearing city election, the situation has been further complicated by politics. Councilmember Fred Shorett claims that the mayor’s continuing to meet directly with the auditors, in defiance of requests from the city manager and city attorney, has exacerbated the situation—even as he made a motion to end discussion of the auditing fiasco before it began on the advice of City Attorney Gary Saenz—advice Mr. Saenz told the Council he had not provided—to avoid raising trouble in bankruptcy court. City Attorney Saenz noted that not only had he not done so, but that if he had, it would only have been offered in closed session. Mr. Saenz added: “I can tell you, however, that hope and the expectation is — and I just spoke with our deputy city manager, Nita McKay — she indicates to me that the hope and expectation is the audits will be ready for the first [Council] meeting in November…And she [Ms. McKay] did not represent this to me, but my understanding is that the ’13-14 audit will be done within a couple of weeks or a month after that.”

None of this debate and discussion can be comforting to Judge Jury, who has made clear her frustration and apprehension with regard to whether the city’s leaders can be trusted to present her federal bankruptcy court with convincing data and information to demonstrate the city’s proposed plan of debt adjustment can be submitted anytime soon, much less provide her comfort that such a plan would not collapse back into a second bankruptcy in a few years.