Special Report: How a vicious circle of self-interest sank a California city

November 13, 2012

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Source: Reuters

SAN BERNARDINO, California - When this sun-drenched exurb east of Los Angeles filed for bankruptcy protection in August, the city attorney suggested fraudulent accounting was the root of the problem.

The mayor blamed a dysfunctional city council and greedy police and fire unions. The unions blamed the mayor. Even now, there is little agreement on how the city got into this crisis or how it can extricate itself.

"It's total political chaos," said John Husing, a former San Bernardino resident and regional economist. "There is no solution. They'll never fix anything."

Yet on close examination, the city's decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America's largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers.

Little by little, over many years, the salaries and retirement benefits of San Bernardino's city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.

Unions poured money into city council elections, and the city council poured money into union pay and pensions. The California Public Employees' Retirement System (Calpers), which manages pension plans for San Bernardino and many other cities, encouraged ever-sweeter benefits. Investment bankers sold clever bond deals to pay for them. Meanwhile, state law made it impossible to raise local property taxes and difficult to boost any other kind.

No single deal or decision involving benefits and wages over the years killed the city. But cumulatively, they built a pension-fueled financial time-bomb that finally exploded.

In bankrupt San Bernardino, a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.

Almost 75 percent of the city's general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents - most of that on wages and pension costs.

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