Bankruptcy: the divergent cases of the city and the county of San Bernardino.

Author:Callahan, Richard F.
 
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  1. INTRODUCTION

    Not all state actors are created equal. A set of challenges exists in explaining the actions of public sector leaders who while being confronted with similar circumstances choose different paths and different strategies. A problem that needs to be addressed in public finance research is how to explain the divergent outcomes of similarly situated jurisdiction. The two contemporary case studies in this paper provide a unique opportunity to compare two similar situated circumstances, with two different set of state actors.

    The cases are the two separate jurisdictions of the City of San Bernardino and the County of San Bernardino. These jurisdictions were at the epicenter of the collapse of the housing market in 2008. The San Bernardino region east of the Los Angeles region experienced one of the sharpest downturns in housing and employment in the United States. The City Council of San Bernardino approved filing for bankruptcy in July 2012. The County of San Bernardino Board of Supervisors approved a balanced budget in June 2012. The City is nested within the County. Both share not only geography, but also the devastating impact of the economic downturn in housing, employment, and tax revenues. Each of these jurisdictions suffered the housing market collapse in the immediate time frame, and both had experienced the exodus of industrial employment over the past two decades. These cases address the need for research that deepen the understanding of the social interactions in public finance (Slusher, 2011, 177). In addition, the cases advance the research on the use of municipal debt around risk-assessment, regulation, and the practical challenges facing financial managers (Martell and Kravchuk, 2012).

    This paper proceeds as follows. In section one, we consider the basic logic of the problem, including research on budgets and finance in local government, as well as the findings from our research on fiscal sustainability in comparable cases in the region. In section two, we consider the cases of the City of San Bernardino and that of the County of San Bernardino. In section three, we resolve the problem with an explanation of the features that explain the divergent outcomes of the comparison cases and the implications.

  2. PART I: THE STATE OF PREVIOUS RESEARCH

    The existing research on bankruptcy is limited by the lack of opportunity for designing studies across comparable features. There are episodic cases, spread across a wide range of geography, spread out over years. Even with the significant reduction of tax revenue in the past five years for local governments in California, currently only five cities are considering, or have already filed for bankruptcy. The descriptive cases emphasized poor oversight of investments, as in the case of Orange County, or collective bargaining contracts that are unaffordable for salaries, health, and retirement benefits, as in the case of the City of Vallejo, or poor fiscal policy choices to foster economic growth, for example in the City of Stockton.

    However, in each of the five current cases of bankruptcy in California, the differences between the cities are significantly greater than the similarity. To know one bankruptcy is to know none of the other bankruptcies. In practical terms, a comparison of Orange County and the City of Stockton would start with a list of different demographics, economies, population sizes, workforces, economic drivers, political cultures and a range of other factors that diverge institutionally, organizationally, and in the community. Additionally, the time frame separated by decades suggests another complication in comparisons. Similarly, a comparison of the cities of Stockton and Vallejo might best be described as alike in unimportant ways. As a well-developed urban, port city, in California's central valley, Stockton is far removed from the demographics and economics driving Vallejo as a suburb in the San Francisco Bay area community.

    Extending this logic across the nation, the institutional design of counties in California is very different than comparable jurisdictions throughout the nation. The difficulty of finding comparable jurisdictions experiencing bankruptcy in one state of the United States, suggest an even greater difficulty in finding shared features on crossing state lines. Geography does matter for economic drivers, as well as for governance design features. In addition, the complexity of pressures include cyclical, structural, and intergovernmental (Chapman, 2008), as well as the "magical thinking" of residents wanting decreased taxation coupled with increased services (Korey, 2011). These factors suggest additional variance across geography in organizational and institutional design.

    One of the great strengths of public finance research is the capacity to aggregate data across a range of jurisdictions, developing trend lines across jurisdictions, across time (see for example U.S. Government Accountability Office, 2013). However, in the absence of shared demographics, economic pressures, and institutional design, a large data set design becomes a weakness in exploring the shared features of bankruptcy. For example, the descriptions of local governments in the aggregate on the use of flexible budgeting does provide important insights generalized from surveying a local government jurisdictions (Beckett and Doamekpor, 2011), but does not provide internal insights as to the decision-making processes that lead to sustainable budgets, or conversely the decisions that can drive a local government to bankruptcy.

    Describing the state of public finance across hundreds of jurisdictions does not get at the question of how each jurisdiction, with separately elected and appointed officials, arrived at a poor fiscal position. Research on the municipal debt market emphasizes the importance of financial managers balancing the trade-off between maintaining a good credit rating while borrowing for needed public projects but calls for more research on institutional design in protecting the public interest (Martel and Kravchuk, 2012, 674-675). Similarly, research that surveys performance management usage (e.g. Moynihan, 2008), can describe the motivation for using data or the conditions that make performance management data more readily used, but does not typically connect performance management research with fiscal performance in a bankruptcy filing by a city.

    An additional limit to the current public finance research is developed by Wagner (2007) in a critique of research that emphasizes the state as an actor responding to events, as opposed to a model of public finance as driven by a complex set of social interactions. Along the lines suggested by Wagner, a recent public finance symposium on flexible budgeting emphasized the need to develop better explanations of resiliency in budgeting and the role of democratic practices in public finance (Sacco, Stalebrink, and Posner, 2011, 90).

    The use of two case studies does not provide the basis for building or testing public finance theory. The research in public finance does provide theories or frameworks for budget decision-making (for example, the impact of politics in Wildavsky, 1961). The design of this paper is not to test existing theory or develop a new theory. Rather, the research design intends to take advantage of a natural experiment to contrast outcomes that occur in the same time frame and geography between San Bernardino County and City and presents an empirical puzzle that the existing literature does not fully explain. The implications of this research can be extended into the future to test a theory or framework of bankruptcy or fiscal stress across a wider range of jurisdiction, as is appropriate for theory development and testing.

    2.1 SOLUTION TO THE PUZZLE

    The matched pair research design of comparing a bankrupt city government with a jurisdiction sharing all the essential demographic, economic, and geographical features, though as a county a different level of government provides a unique opportunity. The essence of our contribution in this article is two fold: one, a research design that allows for a uniquely situated research comparison; two, an explanation of bankruptcy that balances the tension between the role of individuals, in effect leadership explanations, with the impact of organizational and institutional structure.

    Our solution emerges from research into the two cases, but also out of our research on fiscal sustainability in city and county government for the past three years across a wide range of cases in other parts of Southern California (Callahan, 2012; Pisano and Callahan, 2012). The findings from these other cases provide a road map for a deeper understanding of the comparison of San Bernardino City and County. The two cases offer insights into bankruptcy as not simply a function of economic forces or recent poor policy choices but as a result of a pattern of decision-making, a structure of government, and the constraints placed on leadership by structure and electoral politics.

  3. PART II: THE CASES

    The basic logic of our approach is a comparison of the two case studies with considerable shared features, including geography, demographics, economy, same time frame, and similar residential housing. This provides an opportunity to move beyond the episodic study of bankrupt cities or counties. In particular, case study research is particularly well suited to get at the how question (Yin, 1994), with particular importance in understanding questions of governance (Hendrick, Hill, and Lynn, 2004). Moreover, case study research has proven particularly successful at explaining questions of arriving at sustainable self-governing solutions in environmental, common pool resource challenges (Ostrom, 2010). There is considerable precedence for research on municipal, special district, and county bankruptcy, with case studies in New York City, Orange...

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