MOORLACH UPDATE — Voice of OC — October 10, 2011

The city of Vallejo ran out of cash.  It then filed for Chapter 9 bankruptcy protection.  It fought its fire fighter employees union for two years over the issue of solvency, with the city prevailing in both the initial review and its appeal.  Judge McManus said something like, “Welcome to Federal Court, here we can change your negotiated bargaining unit agreements – try to settle this matter outside of my courtroom first.”  The city of Vallejo garnered concessions that look very similar to what the County of Orange negotiated a couple of years ago – new tiers for new hires and more pension withholdings for employees.  The bargaining unit agreements were not addressed.  The story is that the California Public Employees Retirement System, CalPERS, was going to put its full weight into the legal battle and the city of Vallejo did not have the financial resources to take on such a behemoth.

Today the Voice of OC does a piece on the potentiality of a Chapter 9 bankruptcy filing for the city of Santa Ana.  Before you dive into the article, allow me to take the Unrestricted Net Assets – Government amounts reported in each city’s Comprehensive Annual Financial Statements for the year ended June 30, 2010, and divide this amount by the city’s population, and rank the cities on a per capita basis.  This way you can see where your particular city stacks up.  I’ve also included the data for the County, which shows that it and three cities reported negative balances, or deficits.  I want to thank Tony Saavedra and Jon Cassidy of the OC Register for compiling the data, which is available on each city’s website (see MOORLACH UPDATE — Newport Beach Independent — September 16, 2011).  The Unrestricted Net Assets do not reflect the amount that each city owes for unfunded liabilities to its defined benefit pension or retiree medical plans (Other Post Employment Benefits – OPEB).

1              Laguna Beach                                    $1,890

2              La Palma                                              $1,720

3              Tustin                                                    $1,514

4              Cypress                                                $1,486

5              Laguna Niguel                                    $1,349

6              Villa Park                                              $1,262

7              Seal Beach                                          $1,241

8              Lake Forest                                         $1,234

9              Dana Point                                          $1,015

10           Newport Beach                                $1,008

11           Fountain Valley                                 $1,005

12           Garden Grove                                   $    756

13           Stanton                                                $    739

14           Westminster                                      $    641

15           Los Alamitos                                       $    623

16           Aliso Viejo                                           $    594

17           San Clemente                                    $    520

18           Laguna Woods                                  $    448

19           Yorba Linda                                         $    426

20           Costa Mesa                                        $    363

21           Irvine                                                    $    337

22           Mission Viejo                                     $    312

23           Rancho Santa Margarita                $    273

24           Buena Park                                         $    250

25           Laguna Hills                                         $    247

26           La Habra                                               $    193

27           Huntington Beach                            $    173

28           San Juan Capistrano                        $      69

29           Fullerton                                              $      50

30           Orange                                                 $      48

31           Santa Ana                                            $      47

                                                County of Orange                            $      (3)

32           Placentia                                              $  (193)

33           Anaheim                                              $  (356)

34           Brea                                                       $  (858)

Every CAFR has the Basic Financial Statements, which provides assets, liabilities, and net assets.  Every CAFR also breaks these categories out by governmental activities and business activities (for the county business activities are enterprise funds like the landfills and airport).  The data provided above only reflects the governmental activity numbers.  As you can see, a discussion about the city of Santa Ana’s financial condition is justified, but all cities and counties face a similar fate.  Since utilizing Chapter 9 did not really achieve much for the city of Vallejo, will the next entrant obtain a better result?  One can only hope.

Fifteen years ago, The Bond Buyer reflected on the County’s exiting from Chapter 9 Bankruptcy in the LOOK BACK below.

Does Bankruptcy Await Santa Ana?

Although Santa Ana city officials and union leaders are saying they can work together to pare down the city’s $30 million budget deficit, the word bankruptcy is being whispered more often these days in the corridors of City Hall.

And it is clear, as the city and unions enter the early stages of negotiations, that if the two sides don’t agree to drastic cost-saving measures the prospect of bankruptcy will go from a persistent rumor to a distinct possibility.

Yet because there are so few cases of municipal bankruptcy, there is not a clear understanding of what bankruptcy would ultimately mean for the city. Labor contracts may — or may not — be scrapped. The city’s credit rating could be scarred, or it could easily bounce back. Long-term pension obligations have never been tested in bankruptcy court.

"These are experiences we don’t have a lot of history on because Chapter 9 (municipal bankruptcy) hasn’t been exercised very frequently," said Larry Rosenthal, adjunct faculty at the Goldman’s school of public policy at UC Berkley.

Municipal bankruptcy is unique in that a city can’t simply dissolve, sell off its assets and pay back its creditors like a company that files for bankruptcy. Instead, bankruptcy forces cities and their creditors back to the negotiating table. Cities present a budget-balancing plan to a bankruptcy judge who then decides whether the plan will work.

If Santa Ana did indeed file for bankruptcy, the city would join a small inglorious fraternity of public-sector bankruptcies that are already overrepresented by California governments. Orange County’s bankruptcy in 1994 remains one of the great cautionary tales of how a government can go broke betting on Wall Street.

Former county Treasurer Robert Citron gambled away more than $1.6 billion in taxpayer money on sour investments. Interest earnings at one point were supposed to make up 35 percent of the county’s general fund budget. But Citron’s bets failed, and the county continues to pay about $90 million annually to retire debt from the bad investments.

Then in 2008, the Bay Area city of Vallejo began what ended up being a painful, years-long bankruptcy process after the city failed to close a $9 million deficit in its $83 million general fund budget.

The similarities between pre-bankruptcy Vallejo and Santa Ana are undeniable. Both had general fund budgets that were redlining public safety costs to well over 70 percent of the general fund, with the lion’s share of the costs attached to salaries and benefits.

Public safety unions argued that the city could cut in other places to balance the budget, but a judge ruled that the city could tear up its fire and electrical union contracts.

The city took an ax to public safety, chopping down the police and fire departments by eliminating dozens of police officer positions and shuttering firehouses.

"All bankruptcy did was lend assistance to the city in renegotiating the contracts with its workers," Rosenthal said.

But Rosenthal cautioned that Vallejo was just one case and not necessarily a predictor of how a bankruptcy would go in Santa Ana. Once a municipality declares Chapter 9, it puts its fate entirely in the hands of a judge. And a judge could rule in favor of maintaining union contracts.

"It changes the bounds of power between the parties. That doesn’t mean that any given bankruptcy judge will [invalidate the union contracts], but that’s what happened in Vallejo," Rosenthal said.

More Bankruptcies To Come?

Even with the uncertainties inherent in the process, Rosenthal expects that municipal bankruptcy will become an increasingly attractive option to municipalities. As more cities take the leap, bankruptcy lawyers will have an easier time processing such cases, driving the legal costs down, Rosenthal said.

One of the biggest long-term consequences with municipal bankruptcy is the political stigma, something Orange County Supervisor John Moorlach can speak to from experience.

"It gave us a scarlet letter, we [Orange County] will always be known as the county that went bankrupt," Moorlach said. "If they [Santa Ana] go into Chapter 9 the way Vallejo did, they will become famous."

Nonetheless, Moorlach said he hopes that cities will use bankruptcy to tackle their ballooning pension obligations, specifically the plan that allows employees to retire at age 50 with 90 percent of their salaries, known as the "3% @ 50" formula. Vallejo’s city leaders didn’t wade into those waters during its bankruptcy, fearing that they would lose the pension battle.

Vallejo’s agreements with the unions after bankruptcy included slashing retiree health benefits from $1,500 to $300 per month. Payout on accrued leave time was eliminated. Eventually, the city’s fire union agreed to reduce its pension formula for new hires to retiring with 2 percent of final pay for each year served at age 50.

Because of Vallejo’s reluctance to confront what some call the looming "pension tsunami," Moorlach questioned the city’s decision to go into bankruptcy, which ultimately cost the city more than $9 million in legal fees.

"Why would you go into bankruptcy court where you spend a few million bucks when you can do that outside for free," Moorlach said.

Santa Ana also lets public safety employees retire under the "3% @ 50" formula. The annual cost for employee retirement is expected to rise to $20.4 million by next fiscal year, according to a consultant’s report, consuming 11.3 percent of the budget.

"Some city has to go into Chapter 9 and deal with the bargaining agreements," Moorlach said. "We need some kind of unfunded liability messiah to come along."

Jonathan Weber, a journalist who has had a front row seat for the Vallejo bankruptcy, said the city is still suffering mightily in the aftermath. He points to an increase in crime and attributes it to the deep cuts to public safety. The crime has a domino effect, Weber argues, driving down property values and drying up business investment. Ultimately, such deep cuts in services injure the city’s ability to bring in revenue, Weber said.

"I think from the city’s [Vallejo] point of view it was really kind of a grim scenario," said Weber, who is the editor-in-chief of the Bay Citizen, a nonprofit online news organization. "They might argue that they had no choice, but it’s certainly not something that’s a good thing — even from the perspective of a city manger."

The Thinking in Santa Ana

The Vallejo case was widely seen as a cautionary tale for labor unions engaging in bare-knuckle negotiation tactics. In the run up to bankruptcy, city leaders wanted steep concessions from the unions that they simply wouldn’t agree to.

"It’s plain in hindsight that they [unions] would have been better off cutting a deal," Weber said. "Whether they would admit that, I don’t know."

Santa Ana’s public safety unions, at least in the early going, seem to be taking a more conciliatory stance. Santa Ana Police Officers Association President John Franks has been particularly clear in his intentions.

"What I can say is that we will make the necessary concessions," Franks has previously said.

Franks didn’t return a phone call seeking comment on this story, but has said in the past that talk of bankruptcy is an unnecessary distraction. He wants to be able to negotiate in good faith with the city without bankruptcy — or outsourcing of police services — brought into the conversation.

The so-far cordial relationship between public safety unions and city leaders is encouraging, said Councilman Sal Tinajero. The willingness to work together, Tinajero said, is what makes Santa Ana different from Vallejo.

"I’m not even thinking about bankruptcy right now, because bankruptcy right now is not an option," Tinajero said.

Please contact Adam Elmahrek directly at aelmahrek@voiceofoc.org and follow him on Twitter: twitter.com/adamelmahrek. And add your voice with a letter to the editor.

FIVE-YEAR LOOK BACKS

October 10

1996

Joe Bel Bruno of The Bond Buyer reflected on “’Accountability Is the War Cry In Orange County.”

                Orange County’s 18-month journey through bankruptcy court is over, but an army of lawyers still working on the case are continuing to pursue the people and companies allegedly responsible for the unprecedented financial crisis.

                Attorneys representing the county have filed eight separate lawsuits in U.S. Bankruptcy Court against major Wall Street firms including Merrill Lynch & Co. and Standard & Poor’s Corp., accusing them of contributing to the county’s financial crisis.

                The Orange County district attorney’s office has also broadened its legal campaign againt three former and three current county officials for their allege roles in the fiscal debacle.

                “These lawsuits are all about accountability – everyone from county administration to Wall Street,” said county Treasurer John Moorlach, who predicted the county’s investment problems months ahead of time as a candidate for the treasurer’s office.

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