Impending bankruptcy threatens California cities

The smell of coffee and chocolate brownies bounced off linoleum tiles, and wafted out into the hallway of the first floor of the Santa Monica College Bundy Campus last Wednesday. Students, citizens and public servants chatted, and old friends and colleagues exchanged handshakes and hugs. The genial tone was quickly swept away, however, when panelists arrived from SMC’s Public Policy Institute to discuss a raft of municipal bankruptcies, and began to describe the dire situation that many cities currently face.

Three cities in California—Mammoth Lakes, San Bernardino, and Stockton—have recently declared Chapter 9 bankruptcy in federal court. Stockton, with a population of nearly 300,000, is the largest city in the United States to go bankrupt.

Rick Cole, Ventura city manager, and former Pasadena mayor and Azusa city manager, was the first to speak, issuing grave warnings for other cities including Los Angeles.

Cole recalled insolvent cities like Vallejo, where police suffered dramatic budget cuts and downsized from 145 officers to 92 after declaring bankruptcy in 2008. The city of about 116,000 had 17 murders in 2010. Santa Monica, which has about 90,000 residents, experienced one murder that same year.

Cole warned that Los Angeles and San Diego, California’s two largest cities, are heading for insolvency, and that what happened in Vallejo could occur on an exponentially larger scale.

While unfunded liabilities, most notably public employee pensions, are “a huge part of the problem,” according to Cole, they are not the only reason for forcing cities into bankruptcy. Dysfunctional politics at the state and local level, mismanagement, expensive labor contracts, and high poverty and unemployment all contribute to the severe strains on municipal bank accounts.

Kafi Blumenfield, president and chief executive officer of the Liberty Hill Foundation, a nonprofit organization in Los Angeles, explained that when cities run short on money, nonprofits have an essential role to play.

“It is at this very moment these services are needed most,” Blumenfield said.

But coping with the hole in services left by chronic budget shortfalls has left nonprofits scrambling to keep up with exploding demand.

“Nonprofits are already stretched,” Blumenfield said.

Sixty-seven percent of nonprofits in San Bernardino, for example, have revenues under $25,000.

“This puts nonprofits in a terrible position,” Blumenfield said.

Sonia Caravalho, a city attorney for Santa Ana and Claremont and partner at the national law firm Best Best & Krieger, expanded on the idea that mismanagement could take a toll on taxpayers.

“In the good times, the cities were good to their employees,” Caravalho said.

But faced with re-election or difficult labor negotiations, some leaders are content to turn a blind eye to deep structural problems, according to Caravalho.

“It just gets too hard,” Caravalho said. “Some officials just don’t understand a city budget. They’re not always transparent, and maybe that’s on purpose.”

Even during the course of bankruptcy, sometimes little is done to change policies or politicians that contributed to fiscal emergencies in the first place.

“I don’t know if executives have enough to lose,” Caravalho said.

In the end, Cole summed up the fundamental problem facing California’s cities by invoking former President Clinton’s remark about simple arithmetic at this year’s Democratic National Convention.

“There are diverging trends of revenue and expenses,” Cole said. “[Without reform,] the California we are living in will be poorer, grimmer, and more unsafe than it is today.”