As one of the largest American cities ever to declare Chapter 9 bankruptcy, San Bernardino found itself driven to insolvency by three things. Revenues from sales and property taxes were too low; the city’s charter required that public-safety workers’ salaries be equivalent to those in wealthy coastal suburbs; and public-safety workers’ contracts were letting them retire early with high pensions, to which they didn’t have to contribute. Before it looked to Chapter 9 last year, the nation’s second-poorest major city (after Detroit) had a $46 million budget deficit.
If San Bernardino thinks that bankruptcy will solve its problems, however, it needs to think again. High crime makes cutting spending difficult: three-quarters of the city’s budget is devoted to public safety. In fact, to help make payroll, San Bernardino is deferring payments to the state-operated pension system CalPERS. (A federal bankruptcy judge in December prevented CalPERS from suing the city for payment, saying that it would be a death knell for any fiscal recovery.) Bankruptcy can’t compensate for a poor tax base or alter the city charter’s structural defects. To take a recent example, the charter’s pay-equity mandate has required an additional $1 million in salary increases for policemen and firefighters, which the city council ratified on Monday. San Bernardino will now have to cut $1 million elsewhere in its paper-thin budget. Bankruptcy also carries significant risks: the process leaves the city at the mercy of judges, who might force it to sell off assets at below-market rates to meet pressing revenue demands.
In some circumstances, an alternative mechanism in California law might be more appropriate: disincorporation, which can put a flailing, mismanaged municipality out of its misery. Its appeal is precisely that it would address the crucial factors causing San Bernardino’s fiscal mess. It could eliminate outlandish contracts for public employees (often bestowed by politicians elected with donations from public-employee unions). It could reduce pensions for current public-sector retirees, which so far are untouchable. It would make the city charter null and void. Above all, disincorporation would alleviate the problem caused by the flight of financial and human capital from San Bernardino to neighboring towns in San Bernardino County, such as Highland and Redlands. Disincorporation would mean that San Bernardino would cease to exist as a city and would foist its manifold liabilities—and assets—onto its namesake county.
But disincorporating a city of San Bernardino’s size is wholly unprecedented, and any benefits of doing so would depend on a court’s interpretation of California’s cumbersome Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000. The law requires each county to create a local agency formation commission, or LAFCO, to oversee all reorganizations, including disincorporation. Only the small city of Cabazon, population 613, has gone through this process. San Bernardino has more than 200,000 residents.
Disincorporation has its disadvantages, too. The county would be required to make the defunct city’s creditors and bondholders whole. At worst, the county would tax residents of the territory formerly known as San Bernardino at slightly higher rates for a limited time, so that its debts could eventually be paid off. But California’s constitution bars LAFCOs from raising revenues without a popular referendum (though the agency can make some additional taxes—not property taxes—a prerequisite of disincorporation). So it’s likely that the county would assume some of the city’s debts. Because the county’s median income is $15,000 higher than the city’s, the county could absorb the costs much more easily than the city could, whether or not that’s a fair outcome.
Disincorporation involves three steps. First, the city must submit an application with signatures from a quarter of its residents. Second, the LAFCO, which has wide latitude to attach terms and conditions, must approve or deny the application. Sure to be controversial is section 56886 of the Cortese-Knox-Hertzberg law, which allows the LAFCO to modify or terminate existing employment contracts, including pensions. If the application is approved, the third step arrives: a ballot resolution requiring ratification by a majority of the city’s voters.
By disincorporating, San Bernardino would dissolve a government that ignored the warnings of fiscal crisis and that has been bought off by public-employee unions. Perhaps the county would prove a poor administrator, but it would have to fail impressively to perform worse than the city has already.
Jeremy Rozansky is an assistant editor at National Affairs.
