City of Detroit Bankruptcy and a Comparison to the City of San Bernardino Bankruptcy

By Michael Reiter, Attorney at Law

Last night, I was interviewed by ABC (Australia) News (Radio) regarding the filing of Bankruptcy in Detroit.  It aired during drive time in Australia today (July 19, 2013), which I believe was still last night in California.  I was interviewed by Julian Morrow.

The program was RN Friday Drive, and you can find a link to the podcast of the interview.

I was interviewed late last year by RAI-TV in Italy regarding the San Bernardino Bankruptcy, but I have never seen the footage and I don’t know if it was aired.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

Michael Reiter is a partner with Cole Huber LLP
2855 E. Guasti Road, Suite 402
Ontario, CA 91761

“Attention San Bernardino Residents Important City Bankruptcy Information”

By Michael Reiter, Attorney at Law

“ATTENTION SAN BERNARDINO RESIDENTS IMPORTANT CITY BANKRUPTCY INFORMATION” reads the first page of a mailer from the San Bernardino Police Officers Association and the San Bernardino City Professional Firefighters.

The mailer is below (scanned with the back and front first, with the interior page below), and arrived August 4th in post :

The back of the mailer says:


Dear San Bernardino Residents,
San Bernardino’s Firefighters and Police Officers go to work each day
risking their lives and their safety to protect the lives and safety of the
City’s neighborhoods and families.
We’re in this together with you. We have your back- and we know you
have ours.
Mayor Pat Morris and his administration must be held accountable for
the failed policies that have driven San Bernardino into bankruptcy.
His failures cannot be excused.
Your tax dollars have been squandered.
Jobs have been run out of the City.
Vital city services needed to protect San Bernardino’s families are
facing devastating cuts that will threaten public safety.
We’re willing to do our part and make our fair share of sacrifice to help
the City balance its budget- just as we have for the last several years.
As the City moves forward into Bankruptcy Court we will keep you
informed to ensure that you have the facts about how San Bernardino’s
bankruptcy will affect you and your family.
We thank you for your continued support and are honored to serve you.
Yours truly,
SCOTT MOSS, President
San Bernardino City Professional Firefighters
San Bernardino Police Officers Association
Learn more about the City’s Bankruptcy at

Page Two continues:

The City claims to have a $45 million budget deficit that will prevent it from
paying its employees and the other bills it owes by the end of summer.-
Mayor Pat Morris and his administration failed to make the tough choices
necessary to honestly balance the City’s Budget.
According to an outside independent expert, “San Bernardino faced years
of deficit spending. It’s structural gap, however, was covered-up instead of
addressed. The city sold assets, borrowed from city funds, borrowed from
banks and bondholders, used one year’s surplus to cover the following
year’s deficit, and raided its reserves.”
No, it’s very rare. Only one or two cities in the entire
nation declare bankruptcy each year. Recently the
cities of Stockton and Mammoth Lakes declared
bankruptcy, and Vallejo declared bankruptcy in 2008.
Vallejo has completed the bankruptcy process but the
financial benefits are unclear. Vallejo spent $13 million
of taxpayer money on legal bills and still does not
have a balanced budget.

Page Three says:

No. Pat Morris is falsely making this claim to hide the fact that his failures
to stop wasteful spending and balance the City’s budget have driven San
Bernardino into bankruptcy.
The truth is the San Bernardino City Charter, as approved by the voters,
protects taxpayers by limiting the salaries and benefits of the City’s
Firefighters and Police Officers.
Additionally, San Bernardino’s Firefighters and Police Officers have always
been willing to do their fair share to help balance the budget. They’ve
offered and accepted reductions to their pay and benefits for the last four
years that has saved the City millions of dollars.
Unfortunately Mayor Morris and his administration failed to use the money
from these savings to cut the deficit. Instead the money was used for
wasteful pet projects like the SBX line.
The greatest risk bankruptcy poses to residents is in the area of job creation.
The decision to declare bankruptcy will likely make it more difficult to attract
job-creating businesses to the City because they will be afraid to invest in
San Bernardino.
That would likely result in an increase in San Bernardino’s already high
unemployment rate.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708

San Bernardino’s Fiscal Emergency Operation Plan Memo Dated July 23, 2012

By Michael Reiter, Attorney at Law

The City of San Bernardino recently released this memorandum.  The authors of the memorandum, dated July 23, 2012, are Interim City Manager Andrea Travis-Miller and Director of Finance Jason Simpson.  The memorandum is addressed to the Mayor and Common Council.

The summary on the first page says:

On July 18, 2012, the City Council directed the filing of a petition under Chapter 9 of the
United States Bankruptcy Code following the declaration of a fiscal emergency in the
City of San Bernardino. These actions were in response to findings that the financial
state of the City is such that the health, safety, and well-being of the residents of the
City will be jeopardized absent Chapter 9 bankruptcy protection.
This report proposes a Fiscal Emergency Operating Plan, which will enable the City to
operate while it is under Chapter 9 protection and includes recommendations for various
actions related to the City’s Preliminary FY 2012-13 General Fund Budget, which
combined will represent the City’s Financial Plan for FY 2012-13. This Fiscal
Emergency Operating Plan is necessary for the City to operate until the Pendency Plan
is developed under Chapter 9 and is presented for Council consideration as part of this
staff report.

This report covers the funding and operations of the City’s General Fund and does not
include any special purpose or restricted funds with the exception of capital projects.
The budgets for those funds will be provided to the Council by the end of August 2012.

Some other highlights:

From Page 2:

The Preliminary FY 2012-13 Budget has an operating shortfall of $45.8 million and does
not provide for any reserves nor does it address the estimated $18 million negative cash
balance in the General Fund. At Fiscal Year end, the negative cash is expected to grow
to $59.2 million in the absence of drastic measures to reduce the City’s obligations
through restructuring. The City’s financial situation is dire with no revenue or other
funding sources available to balance the City’s budget and address prior years’ deficits.


In bold, from Page 2:

The City must create a plan to emerge from this
fiscal crisis that is truly sustainable, with reliable ongoing revenues covering the
full operational costs, both direct and indirect, and sufficient reserves to weather
economic uncertainty, revenue fluctuations, and emergency spending

From Page 3:

City staff will be reducing costs through the realignment of the organization and will
present a balanced budget for consideration by the Council during the coming weeks.
However, the actions to date have been insufficient and without further reduction of
costs through restructuring of obligations and severe service level reductions, the City
will be unable to adopt a balanced budget as required by the City’s Charter and the
State Constitution.

General Fund Negative Cash Balance of $18 million dollars as of June 30, 2012:

Overall, the balance of the City’s total cash and investment portfolio, as reported in the
most recent financial statements for the year ended June 30, 2012, (unaudited) was $27
million. Of this balance, 100% was held in restricted funds (assessment districts,
bonds, trust funds, special revenues, and tax measures), and the General Fund has a
negative cash balance of $18 million. While the City continues to hold investment
balances, the balances are from restricted sources not available for general operations.

City’s Unfunded liabilities of $296 million:

In addition to the City’s bonded indebtedness and lease obligations, unfunded liabilities
total approximately $296 million. Unfunded liabilities include unfunded pension
obligations of $195 million, retiree medical of $61 million, compensated absences of $20
million, general liability of $10 million, and worker’s compensation of $10 million.

Actions for the next three months:

remainder of the schedule details the actions proposed to be taken to meet the cash
flow needs of the City during this interim time frame. Measures proposed include:
1. Deferring debt and lease payments due in the First Quarter in the amount of
$3,556,972 until some later date. Debt and lease payments include payments for
Pension Bonds and Infrastructure Bank Loans.
2. Deferring the annual debt payment on the New World system in the amount of
3. Maintaining vacancies resulting in a savings of $531,000 per month in salaries,
$158,031 per month in PERS payments, $53,919 per month in health insurance
costs, and $9,200 per month in other benefit payments.
4. Continuing the employment concessions agreed to by the General Unit, Middle
Management Unit, and Management/Confidential Unit in the amount of
$2,994,764. The agreements with the Police Safety, Police Management, and
Fire Management have not expired, and there currently is no contract with the
Fire Union.
5. Deferring the ARC contribution for retiree health due in the First Quarter in the
amount of $2,219,332.
6. Deferring capital improvement projects for the foreseeable future.
Unfortunately, these measures are intended to enable the City to meet its obligations
over a 3-month period and will not result in a sustainable, balanced budget. City staff is
preparing a Pendency Plan which will serve as the budget until the bankruptcy court
approves a long-term Plan of Adjustment. Over the next 30 days, staff will work to
prepare a Pendency Plan that focuses the City’s limited resources on sustaining basic
service delivery, addressing contractual obligations, and establishing a fair,
compensation structure so the City can retain quality employees to provide essential
public services. The Pendency Plan will balance anticipated revenues against
expenditures through a restructuring of the organization and service delivery
necessary to reduce expenditures by roughly 30% of the Preliminary Budget.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708

The Wrong Answer to Post-Bankruptcy San Bernardino

By Michael Reiter, Attorney at Law

There is a lot of misinformation out there about the City of San Bernardino regarding proposed reform efforts to the system of government for the City of San Bernardino.

One was a suggestion to transform the City of San Bernardino from a Charter city to a general law city.  There are generally benefits to being a charter city in that you have a modicum more home rule then a general law city.  However, if people think that converting to a general law city will get rid of the ward system they are mistaken for two reasons.  First, general law cities can have elections by district.  Redlands (a general law city), briefly, had elections by district, and Colton, a general law city, still has districts.

Second, when City Attorney Penman suggested a charter measure to do away with the ward system, he was met with challenges from rights groups.  I believe that effort was before the California Voting Rights Act was passed, which makes it easier to prove dilution in an at-large election.

If the City of San Bernardino’s structure (the composite Strong Mayor, Strong City Manager, Strong Council Form of Government) is the problem, removing the Charter gives the residents less choice in creating a government. If this is just an end-run to trying to get rid of the elected City Attorney, the voters have already shown with the resounding defeats of Measures C and M that they do not want that.  Going to a general law council-manager form of government would not have prevented this kind of insolvency, because if there were illegal activities by staff, they council still would not detect it, and if the council refused to listen to staff regarding the need for cuts, it wouldn’t matter if they were elected according to general law or a charter.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

Michael Reiter, Attorney at Law

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708

City of San Bernardino Bankruptcy: What Did They Know and When Did They Know It?

By Michael Reiter, Attorney at Law

We do not yet know the full story about what went wrong as far as misstatements or miscalculations (incompetence) or concealment (fraud) of numbers in the City of San Bernardino that led to the situation wherein the City of San Bernardino had or has, at some point, less than $150,000 in its bank account.

First, from primary sources, City staff (on July 9, 2012) stated that as of April 3, 2012, City staff was still misreporting the fund balance.

The Finance Department of the City of San Bernardino created a report, dated July 9, 2012 , Page 7:

Starting General Fund balance has been erroneously stated for the past 2 fiscal

Fiscal Year                                July 1st Audited Fund Balance              Staff Reported Fund Balance
FY 2009-2010                           $2,708,319                                                     $2,557,900
FY 2010-11                               $410,293                                                             $1,770,400
FY 2011 -12                              $(1 ,181,603)                                                       $2,044,100*
*Mid-Year report presented April 3, 2012.

Going back to the April 3, 2012 meeting in the City of San Bernardino’s online archives, I was unable to find any minutes after January 23, 2012.  Here is the April 3, 2012 Agenda for the Joint Adjourned Regular Meeting of the Mayor and Common Council.

In a staff report by Rebecca Garcia, through City Manager Charles McNeely, for Item 3A, the purpose of the workshop was to “Discuss proposed revenue enhancements and cost containment strategies and provide direction
as to measures to be researched and presented for further Council review, analysis and consideration at a future meeting.”  This staff report includes the chart that gives the $2,044,100 opening fund balance for FY 2011-2012, but also has a different number (then in the July 9, 2012 report) for 2010-2011: $2,998,000.

In the staff report by Jason Simpson, Director of Finance, for Item 1A,  on the April 3, 2012 agenda he warns on Page 10:

A major concern that needs to be noted is that the City’ s General Fund continues to be in an
increasing weakening condition and immediate changes need to be made to reverse this financial
condition, build the General Fund Reserve, and stabilize this fund. If these efforts are not made,
insolvency or bankruptcy may result. The Council has an opportunity to resolve the issue and
change the City’ s course. If not, control may be taken out of the Council’ s hands. [Emphasis Added]

However, on packet page 12, Jason Simpson’s report gives the opening fund balance for 2012 as $2,044,100.

Imran Ghori wrote an article published April 3, 2012 at 9:15 p.m., “San Bernardino: City Faces $3.8 millon shortfall[;] The decline in sales and property taxes are hurting the city, a mid-year budget report shows.”  The story starts:

San Bernardino could be headed for insolvency or bankruptcy if it’s not able to get its general fund budget under control, according to a mid-year budget report presented to the mayor and City Council on Tuesday. [Emphasis Added].

The first time the fund balance issue was in the traditional press is in The Sun, “San Bernardino facing bankruptcy if deep cuts aren’t made” by Ryan Hagen, posted online on July 7, 2012 at 8:13:10 p.m. PDT.  In the article, ”

“[Council member Wendy] McCammack also said she was troubled by the budget report’s note that the general fund’s starting balance has been erroneously stated for the past two fiscal years.

That reached a peak several months ago, when then-City Manager Charles McNeely said the fund had a balance of $2 million but the audited fund balance on July 1 turned out to be in the red by $1.2 million.

It appears that the first time that City Attorney James F. Penman mentioned, in public, that 13 out of 16 budgets may have been falsified (and I am paraphrasing from the press account) was at the July 9, 2012 Council Meeting.

As far as what did people know and when did they know it, the rest is from press articles. This article, from public radio station KPCC, “San Bernardino authorities confirm probe into city finances” by Steven Cuevas with Nick Roman, posted 6:00 a.m. on Friday, July 13, 2012 says:

Before the San Bernardino City Council’s bankruptcy vote Tuesday, City Attorney Jim Penman announced that unidentified city administrators had cooked the books to make it appear the city had more cash in reserve than it actually had.

The alleged deceit was uncovered during an audit by new finance staff working under interim city manager Laura Travis-Miller, who took over four months ago.

. . .

Sixth District [sic] councilman Rikke van [sic] Johnson said Penman gave a short briefing to council members prior to the council’s emergency budget meeting Tuesday. But he said it was short on details.

“It wasn’t nothing as far as, ‘OK, this year that happened’ or ‘that year, this happened’ or anything like that,” said Van [sic] Johnson.

“There wasn’t no specifics, other than he said that it’s under investigation. And unfortunately, what was said in that so-called briefing should have stayed in that so-called briefing and went to the right parties. Because we’re dealing with an even bigger issue then that that as far as bankruptcy. All the sudden your issue becomes the lead issue when it shouldn’t be.”

Presumably, this information was given in closed session.
This blog piece comes from an interview yesterday with Interim City Manager Andrea Travis-Miller:  The piece appears in the Los Angeles Times Blog LA NOW, posted July 13, 2012 at 7:25, by Abby Sewell and Phil Willon, labled “Criminal Probe

Miller said the city’s financial problems had been evident for many years, but the full scope was not evident until more recently, when she and the new finance director took a hard look at the books.

She said there had been inaccurate financial reporting in the city for many years, which delayed the process of understanding the full financial picture, but she said she had not seen evidence of deliberate wrongdoing.

“I have not found that there’s anything more than negligence, maybe sloppiness,” she said, adding that staffers at the time were stretched thin because of cuts.

Andrea Travis-Miller became acting City Manager on May 8, 2012, but was assistant before.  Jason Simpson began work on March 28, 2012.  So, if the quotes from Andrea Travis-Miller are correct, the problem was found sometime between March 28, 2012 and when the July 9, 2012 report was posted.

Bankruptcy was first mentioned in the April 3, 2012 staff report.  The misstating of the fund balance was found some time after March 28, 2012, but not reported on April 3, 2012 by Jason Simpson in his staff report.  The first public document showing the wrong data for two years was in a report for the July 9, 2012 meeting.  Time will tell  what they knew, and when they knew it.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708

What Charter Reform Measures Might Have Helped the City of San Bernardino Avoid Bankruptcy? An Elected Auditor and an Elected City Prosecutor.

By Michael Reiter, Attorney at Law

We do not yet know the full story about what went wrong as far as misstatements or miscalculations (incompetence) or concealment (fraud) of numbers in the City of San Bernardino that led to the situation wherein the City of San Bernardino had or has, at some point, less than $150,000 in its bank account.  Some political campaigns in San Bernardino County have more than that in their accounts right now.

The Finance Department of the City of San Bernardino created a report, dated July 9, 2012, that blames, on page 1 in the Executive Summary:

. . . the City is still facing insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth, and increases in pension and debt costs.

Something went wrong with the way government is supposed to work, with checks and balances regarding these unspecified accounting errors.

The Charter of the City of San Bernardino has a variety of checks and balances, and there are also external checks and balances in the municipal system of government from California law and to some extent in Federal law.

Within today’s Charter, there are eleven elected officials in the City of San Bernardino: Council members from seven geographical wards, an elected Mayor, an elected City Clerk, an elected City Treasurer, and an elected City Attorney. However, the structure if the City lacks an appropriate check and balance to find either a well-concealed fraud, or even a miscalculation of numbers that appeared on financial reports but did not reflect actual amounts.

Here is the problem, from the same July 9, 2012 report, Page 7:

Starting General Fund balance has been erroneously stated for the past 2 fiscal

Fiscal Year                                July 1st Audited Fund Balance              Staff Reported Fund Balance
FY 2009-2010                           $2,708,319                                                     $2,557,9oo
FY 2010-11                               $410,293                                                             $1,770,400
FY 2011 -12                              $(1 ,181,603)                                                       $2,044,100*
*Mid-Year report presented April 3, 2012.

Shouldn’t an audit have found the problem? Maybe, but if there was actual fraud, it can be difficult to find because some skilled in financial deceit can falsify document to make the numbers match up.  Even if a skilled City Council member with a background in accounting exists, they probably won’t find the discrepancy.   However, from these numbers, it seems that an audit did catch these numbers, though it doesn’t say when and who it was reported to.

What about the City Treasurer?    The Treasurer’s Duties are:

The Treasurer shall receive and pay out all moneys belonging to the City, and shall keep an account of all receipts and expenditures, under such rules and regulations as may be prescribed. He/She shall make a
monthly statement to the Mayor and Common Council of the receipts and expenditures of the preceding month, and shall perform all duties required of him/her by law and the Mayor and the Common Council. He/She shall not pay out any monies belonging to the City except on claims presented, allowed and submitted in the manner provided by this Charter.   Charter section 70.

However, if numbers are falsified by members of the Finance Department (which the Charter gives day-to-day supervision to the City Manager), the City Treasurer’s Office may not catch the problem.

What then, is the answer?  Part 1, Create a City Auditor, like the City of Los Angeles Controller, that is elected and has the power to audit, investigate, and request prosecution or discipline according to the needs of the situation.

The Controller in Los Angeles, per the Los Angeles City Charter, has these duties:

BookmarkSec. 260.  Auditor and General Accountant.

The Controller shall be the auditor and general accountant of the City and shall exercise a general supervision over the accounts of all offices, departments, boards and employees of the City charged in any manner with the receipt, collection or disbursement of the money of the City.  The Controller shall be elected as provided in Section 202.

BookmarkSec. 261.  Powers and Duties.

The Controller shall:

(a)     appoint assistants, deputies, clerks and other persons as the Council shall prescribe by ordinance;

(b)     prescribe the method of keeping all accounts of the offices, departments, boards or employees of the City in accordance with generally accepted accounting principles, except that any change of the system of accounting shall first be authorized by the Council;

(c)     regularly review the accounting practices of offices and departments and upon finding serious failings in accounting practices, be empowered to take charge of the accounting function, and thereafter assist the office or department in implementing appropriate accounting standards and practices;

(d)     maintain a complete set of accounts which shall be deemed the official books and accounts of the City, which shall show at all times the financial condition of the City, the state of each fund, including funds of departments responsible for managing their own funds, the source from which all money was derived and for what purposes all money has been expended;

(e)     in compliance with generally accepted government auditing standards, audit all departments and offices of the City, including proprietary departments, where any City funds are either received or expended; be entitled to obtain access to all department records and personnel in order to carry out this function; establish an auditing cycle to ensure that the performance, programs and activities of every department are audited on a regular basis, and promptly provide completed audit reports to the Mayor, Council, and City Attorney and make those reports available to the public;

(f)     maintain a reconciliation between the accounts in all offices and departments with the accounts in the Controller’s office, and from time to time, verify the condition of all City funds in the City Treasury, and report to the Mayor and Council thereon;

(g)     allocate among the several respective funds all public money at any time in the City Treasury not otherwise specifically allocated and appropriated by law or ordinance, and promptly notify the Treasurer of the allocation or appropriation;

(h)     report to the Mayor and Council, at times established by law, the condition of each fund, and make other reports as the Mayor or Council requests;

(i)     maintain each fund on a parity with its obligations at all times by transferring from the Reserve Fund as a loan to any fund which may become depleted through tardy receipt of revenues, and upon receipt of revenues sufficient to make an allocation as will restore each fund to parity, retransfer the amount of the loan to the Reserve Fund;

(j)     monitor the level of debt incurred by the City and report periodically to the Mayor and Council on City debt; and

(k)     conduct performance audits of all departments and may conduct performance audits of City programs, including suggesting plans for the improvement and management of the revenues and expenditures of the City.  Nothing in this subsection shall preclude the Mayor or Council from conducting management studies or other review of departmental operations.

BookmarkSec. 262.  Approval of Demands on Treasury.

(a)     The Controller shall, prior to approval of any demand, make inspection as to the quality, quantity and condition of services, labor, materials, supplies or equipment received by any office or department of the City, and approve before payment all demands drawn upon the Treasury if the Controller has adequate evidence that:

(1)     the demand has been approved by every board, officer or employee whose approval is required by the Charter or ordinance;

(2)     the goods or services have been provided, except that advance payment may be authorized by ordinance for specified categories of goods and services;

(3)     the payment is lawful;

(4)     the appropriation for the goods or services has been made;

(5)     the prices charged are reasonable;

(6)     the quantity, quality and prices correspond with the original specifications, orders or contracts; and

(7)     any additional criteria established by ordinance have been satisfied.

(b)     Notwithstanding subsection (a), the Controller shall delegate to the various offices and departments the duties of inspection of goods and services and approval of demands, in accordance with methods for inspection and approval established by the Controller, but the Controller may suspend the authority delegated pursuant to this subsection upon a finding of abuse of that authority or on a determination that the office or department lacks adequate controls to exercise that authority properly.  In the event of suspension of the authority delegated pursuant to this subsection, the Controller shall assist the office or department to achieve adequate controls and standards prior to reinstatement of that authority to the office or department.

(c)     The Controller shall withhold approval of any demand, in whole or in part, if there is a question as to whether it is improper, illegal, or unauthorized, and immediately file a report with the Mayor and Council stating the objections to the demand.  The Council shall promptly consider the report and may overrule or sustain the objections of the Controller.

(d)     The Controller shall keep a record of all demands on the Treasury approved by the Controller and of all demands to which objections have been made and overruled.

BookmarkSec. 263.  Approval of Expenses of Controller.

All demands for the expenses of the office of the Controller shall, before payment, be presented to the Mayor, who shall have the same powers as to approval or disapproval as are exercised by the Controller in the case of other demands. The action of the Mayor shall be subject to review by the Council.

BookmarkSec. 264.  Reduction of Demand on Treasury.

No demand upon the Treasury shall be allowed by the Controller in favor of any person or entity indebted to the City without first deducting the amount of the indebtedness, to the extent permitted by law.

BookmarkSec. 265.  Payment of Bonds.

Nothing in this Article shall be construed as interfering with or preventing the payment by the Treasurer of principal and interest on bonds payable by the City in accordance with the California Constitution, laws and ordinances authorizing the issuance and payment of those bonds.

BookmarkSec. 266.  Periodic Surveys of Proprietary Departments.

(a)     The Controller, Council and Mayor shall jointly cause, at least once in every five years, an industrial, economic and administrative survey to be made of the business and property of each of the Harbor, Water and Power and Airports Departments and shall select an independent qualified industrial engineer or organization specializing in such surveys to conduct the survey.  The cost of each survey shall be paid for from the funds of the surveyed department.

(b)     Each survey shall be made in consultation with the Mayor and City Council to ascertain if the surveyed department is operating in the most efficient and economical manner.

(c)     A copy of the report of each survey shall be transmitted to the Mayor, Council, and board of the surveyed department and shall be made available to the public.

Solution Part 2: Create an Elected City Prosecutor.  The City Attorney in San Bernardino is already the City prosecutor.  However, by splitting the functions, the City will have the best of both worlds.  An elected City Attorney will give advice to the City as an entity without the fear of being fired for not giving advice to the other elected officials in power, and a City prosecutor can prosecute violations of the Municipal Code and the areas of State law given by Charter or state law with the independence necessary, with the independently elected City Auditor, to root out these kinds of corruption.

If an elected City Attorney is an elected watchdog, a City Prosecutor would be doubly so.  The City Attorney’s client is the City of San Bernardino, the entity, and the City Attorney must protect the entity’s pocket book.  The role of exposing corruption sometimes is at odds with that goal.  Adding a separate elected City Prosecutor can rectify that situation and protect, in the long run, the People’s interest without regard to the City’s financial interest.

Of course, the bad numbers shown above do not add up to the alleged deficit, but if Council members were going on the correct numbers to start with, perhaps they would not have made the political choices that led to the fiscal emergency.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708

Why the Impending City of San Bernardino Bankruptcy Matters

By Michael Reiter, Attorney at Law

The news that the Mayor and Common Council voted 4-2-1 to authorize the City Attorney to file for bankruptcy under Chapter 9 of the United States Bankruptcy Code is important from a legal perspective.  We appear to be moving into a new era where bankruptcy is not something to be feared, but is embraced as a solution for municipalities.  San Bernardino is the third municipality in California to move towards bankruptcy this year, and no doubt is not the last.

According to the Administrative Office of the United States Courts,

The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Although similar to other chapters in some respects, chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs. Indeed, due to the severe limitations placed upon the power of the bankruptcy court in chapter 9 cases (required by the Tenth Amendment and the Supreme Court’s decisions in cases upholding municipal bankruptcy legislation), the bankruptcy court generally is not as active in managing a municipal bankruptcy case as it is in corporate reorganizations under chapter 11. The functions of the bankruptcy court in chapter 9 cases are generally limited to approving the petition (if the debtor is eligible), confirming a plan of debt adjustment, and ensuring implementation of the plan. As a practical matter, however, the municipality may consent to have the court exercise jurisdiction in many of the traditional areas of court oversight in bankruptcy, in order to obtain the protection of court orders and eliminate the need for multiple forums to decide issues.

What this means is that the City will be able to renegotiate its debt, change certain contractual terms, including agreements with its employees, and possibly reduce or eliminate debts.  The City will not give up control to a trustee in the same way seen in corporate bankruptcy.  There will be no effect on code enforcement prosecutions, and the City will not have any special way to raise money through taxes outside of California law.

What about AB 506, the law codified at Government Code section 53760 et seq.?

That section reads:

A local public entity in this state may file a petition and exercise powers pursuant to applicable federal bankruptcy law if either of the following apply: (a) The local public entity has participated in a neutral evaluation process pursuant to Section 53760.3. (b) The local public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board pursuant to Section 53760.5.

There has been no mention of AB 506 in the coverage so far, and the agenda for yesterday’s meeting does not have any mention of such a resolution, but presumably, the City of San Bernardino will take the (b) path.

Posted on our sister site is an analysis of the political implications of such a move.

The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog.  You should consult an attorney for advice regarding your individual situation.
Michael Reiter, Attorney at Law

A: 300 E. State St., Suite 517
Redlands, CA 92373-5235
T: (909) 296-6708