San Bernardino Officials Knew of Financial Woes, Documents Show

This week's warning that the city was in financial trouble eerily echoes the words of a former finance director.

The fiscal crisis that led San Bernardino’s decision this week to seek bankruptcy protection has been building for years – and top officials knew it, documents show.

As far back as 2008, an internal finance department memorandum reveals, the inland city faced a projected deficit of more than $20 million.

Related: City Workers "Nervous, Anxious" Over Bankruptcy Filing

More deficits followed, as the crushing economic downturn reduced the city’s share of property taxes and other revenues. The following year, a new city manager made a similar warning.

“In my first few months here, I have come to realize how ill-prepared the city was for the sharp economic downturn that occurred,” wrote Charles McNeely, who took over as city manager in 2009, only to leave two months ago. “General fund reserves are insufficient and almost non-existent.”

Using words that eerily echoed those older reports, the city’s newest leaders warned of impending financial doom in yet another document, this one dated June 26.

“Reserves in the general fund were exhausted years ago,” wrote finance director Jason Simpson and interim city manager Andrea Miller in their report, which was presented to the city council July 9. “The city faces insolvency.”

The San Bernardino city attorney said Wednesday night that falsified financial documents may have contributed to the city's looming financial woes.

"Any evidence of suspected wrongdoing has been turned over to the appropriate government agencies," said James Penman.

Penman did not provide further details but said the audits were necessary because the bankruptcy filing should eventually disclose any wrongdoing on the part of city officials.

On Tuesday, citing unexpected news that it had no financial reserves and might be unable to make its July payroll, the city council voted to authorize its lawyers to file for bankruptcy protection. If the city does take that step, it will become the third California municipality to do so since June, following Stockton and Mammoth Lakes.

The news that the city was on the brink of insolvency came as a surprise to many in the community.

But one insider, who feared being fired and spoke on condition of anonymity, said it was impossible not to know how bad the situation had become.

“It’s been presented to council over and over again that our financial situation is not good,” this person said. “It’s been presented that, “You’ve got to take action and you need to fix it. And they just never did it.”

The bankruptcy will give elected officials in San Bernardino leeway to negotiate with unions, retirees and others to cut jobs and reduce benefits. Until now, the city has avoided layoffs, though it has cut hundreds of jobs through attrition.

But it will also be hugely disruptive, according to experts in city finance.

Residents can expect significant cuts in public services, and employees will likely have to shoulder layoffs and a reduction in their benefits, said Chris Hoene, director of research for the National League of Cities.

“Bankruptcy sort of resets the table,” Hoene said. “Typically, these re-negotiations haven’t gone as far as needed in order to bring the budget back to balance, and so bankruptcy forces these deliberations.”

A bankruptcy would also make it harder for San Bernardino to borrow money – perhaps at the very time that funds are needed.

The cost of borrowing “just goes through the roof,” after bankruptcy, said Gregory Minchak, a spokesman for the League of Cities. “It buys time sometimes, but it can really damage the credit.”

State law normally requires municipalities to wait 60 days before starting the bankruptcy process, in order to negotiate with employees, labor unions and creditors and avoid a filing.

But San Bernardino spokeswoman Gwen Waters said the law allows an exemption if it is not practical to wait that long.

Once a filing is made, all revenues and expenses will be on the table, she said, including police and fire protection and employee pensions, she and others said.

Miller and Simpson, in their financial report, said one way to save money would be to make cuts to the fire department and instead rely on regional assistance agreements with other cities and counties.

“There will be cuts across the board,” San Bernardino mayor Pat Morris told NBC4. “This is going to be a severe financial haircut for the city.”

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