San Bernardino Bankruptcy Avoidable
Former San Bernardino city manager says partisan infighting drove city over “fiscal cliff”
By: Chris Levister
(San Bernardino, Calif.) Despite plummeting tax revenue, lost jobs, lost development projects, slumping housing values and rising public safety costs, bankruptcy was avoidable said former San Bernardino city manager Charles McNeely.
On July 10 the city abruptly succumbed to its financial insolvency when a divided City Council authorized a Chapter 9 bankruptcy filing after they were presented with a dismal financial picture.
“It was really about the politics of this community and its elected leader’s stunning lack of will to protect San Bernardino from ruin,” said McNeely in a July 13 interview, calling the acrimonious environment at City Hall “a hotbed of poisonous bickering, intimidation and denial.”
“As elected officials, we lacked the will to govern,” Sixth Ward Councilman Rikke Van Johnson said during a heated town hall meeting two days after the historic vote.
His voice shaking, the two-term councilman said he was surprised when interim City Manager Andrea Miller recommended bankruptcy after presenting a dismal financial picture. He stopped short of suggesting the entire council and administration be recalled instead urging residents, businesses and church leaders to rise up, get involved and demand accountability from the city’s elected officials.
“The eight photographs of your elected leaders hanging in City Hall should be replaced,” Johnson said. “This is a terrible stain on our city.”
For McNeely who resigned unexpectedly in May the first signs of trouble came in June 2009 shortly after he took the job in late 2008 following a 13-year run as city manager of Reno, Nevada.
“Friends and colleagues across the country called me saying – ‘what are you thinking, can’t you see you’re flirting with disaster,’” recalls McNeely.
Undaunted McNeely hit the ground running viewing San Bernardino’s problems not unlike other aging and economically challenged communities across the nation.
“I wanted desperately to see this city rise from the ashes. What some saw as a waiting disaster I saw as great potential,” he said.
Rather what McNeely discovered in plain view was a city headed off a fiscal cliff. Revenues were plummeting. Cash was so tight that potholes went unfilled, burned out street lights were ignored, parks and other public spaces were left unkempt, businesses moving out – criminal gangs moving in.
The city’s retail sales fell from $3.28 billion in 2005 to $2.3 billion in 2011, a 30 percent decline. Meanwhile, the assessed value of the city’s housing stock dropped from $12.2 billion in 2008 to $10.3 billion in 2011. About 70 percent of homeowner’s mortgages were under water.
The city’s public safety budget had ballooned from 53% in 1996 to 63% in 2005 to 75% in 2012.
The state’s decision to abolish California’s redevelopment agencies exacted another blow. San Bernardino used $5 million in RDA funds to repair roads, trim trees and boost its general fund, said Mayor Patrick Morris. Now approximately $125 million in annual redevelopment funds were also gone.
City leaders slashed public employee jobs, demanded concessions from unions, and auctioned off swaths of public land.
But they failed to heed warnings that such onetime cuts weren’t enough to stop the bleeding,” said McNeely.
Soon after his arrival in 2009 McNeely made tough recommendations to fix the endemic financial issues. In that presentation he recommended drastic structural changes such as revenue enhancements, restructuring labor contracts, looking at consolidation of some city functions, exploring further charter changes, examining privatization of some city services and establishment of joint powers agreements.
“We uncovered a lot of duplication, for example we had separate financing and human resource functions in several different departments. We had too many department heads. I said we can’t keep spending money we don’t have. The council’s response was to make some cuts, but they were unable to make the major decisions necessary to put the city on sound financial footing,” said McNeely.
That was late June 2009 two years after a 2007 report from Management Partners labeled San Bernardino’s financial situation ‘tenuous’.
The report also says, “The reality is that the city’s general fund finances are tenuous. Aside from public safety, it is questionable whether the City can maintain funding for existing program service levels, and there are unmet needs that are becoming critical.”
Based on that review, almost three years before the July 10, 2012 bankruptcy vote, McNeely says he authorized Management Partners to revisit the city’s financial status. A subsequent report painted an even more daunting picture.
What was the council’s reaction to the warnings?
“I was roundly criticized. Some members of the council accused me of using the ‘B’ (bankrupt) word as a scare tactic to raise taxes. Others alleged I was hiding money, calling my recommendations too conservative and draconian,” said McNeely.
In 2010 McNeely says he brought in outside professionals including John Husing, the region’s leading economist to help make his point that real changes were needed.
On March 11, 2010, Husing laid out a “most likely case” financial projection at a budget workshop warning the full City Council of financial ruin. “Again those warnings went unheeded,” said McNeely.
In August 2010 McNeely gave a presentation to the council that became known as Ground Hogs Day. “We called it that because like the movie with same name, the same financial gimmicks kept happening again and again with the same results – no substantial changes.”
McNeely said the atmosphere grew more toxic after the 2011 election.
“You cannot have the employee on one side of the table and the person that they’re contributing to their campaign on the other side,” said San Bernardino City Councilman Fred Shorett referring to the 2011 election when two labor candidates were elected. “That’s not going to lead to fair negotiations, and the proof is in the pudding.”
McNeely weighed in on City Attorney Jim Penman’s surprise allegations that 13 of 16 years of budget were falsified to indicate a surplus saying he had no knowledge of anyone ‘cooking the books’. He pointed to a July 12 statement by the city’s auditors indicating no falsification signs.
McNeely said, “Penman was at virtually every budget meeting we had from the time of my arrival. He heard the bad news in 2009 and every year since; he was and is fully aware of the city’s fiscal crisis.”
Former Councilmember Tobin Brinker agrees that Penman knew of the fiscal problems. “On Aug. 23, 2010, Treasurer David C. Kennedy, then-City Manager Charles McNeely, then-Finance Director Barbara Pachon and an auditor warned that reserves were nearly depleted, investments down $40 million and the city had all the symptoms of bankruptcy.”
“McNeely said he referred several matters for investigation during his tenure to the police and district attorneys office, none of them had anything to do with bankruptcy.”
Looking back McNeely describes his three years as city manager as “extremely frustrating.”
“Most of these elected officials are hard working dedicated public servants, however, as a group they simply could not get past their partisan bitterness.”
McNeely has kept a low profile since the bankruptcy vote choosing not to participate in the dueling news conferences and flying accusations over who is to blame for the city’s troubles.
“At a time when the city is faced with major financial issues, kicking the can down the road, blaming people and point fingers which is characteristic of this city’s history is not going to make the problems go away. It’s time for the city government to come together and use all of their resources and to make the tough choices to put this city on a sound financial footing,” said McNeely.
At the end of the day McNeely says, even with the city’s monumental challenges and uncertain future, “San Bernardino remains a city with extremely dedicated employees and great potential.”