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Hey, San Bernardino, it's a rainy day

The city's bankruptcy filing is the latest reminder that governments need to an adequate keep financial reserve.

July 12, 2012

The whole point of a state or local government keeping money in reserve for fiscal emergencies is to have it on hand for — well, for fiscal emergencies. What does an emergency look like? It could take the form of an earthquake or other natural disaster that creates a need for immediate rescue expenditures while shutting down revenue-producing businesses for weeks, months or longer. Or it could come in the shape of economic collapse. Or in some form we can't currently imagine. Money socked away in reserve, often called a "rainy-day fund," can help the struggling city, county or state continue to operate during the emergency.

That's something to keep in mind as facts emerge about the insolvency and coming Chapter 9 bankruptcy filing of San Bernardino. Among the management problems that steered the city toward failure was the unwillingness of officials there to keep an adequate reserve.

In times of fiscal distress, many groups lobby cities, counties and states to spend down their reserves. Unions want governments to hire workers, not lay them off. Taxpayers want them to spend what they have more wisely, not raise taxes to keep reserves up. Vendors want payments made sooner, not later. "It's a rainy-day fund," they say. "Well, it's raining. This is what we saved for. Now is the time to spend it."

PHOTOS: California cities in bankruptcy

Only in retrospect does it become clear that the supposed rain was just a drizzle, and that the real downpour was on its way — in the form of the mortgage meltdown, or perhaps (details are still sketchy) sloppy or inaccurate budgeting. It's hard — but essential — for governments to keep their reserves intact, especially in times of fiscal uncertainty.

San Bernardino offers a warning of another kind as well, for both sides of the argument that public employees with fat pensions are fleecing taxpayers. For those who see bankruptcy as some kind of moral comeuppance to retirees, please note that Chapter 9 leaves pension obligations unaffected. New wage bargains will have to be reached with current employees, but the city's pension burden will remain intact. And unions that focus too much on getting as much as they can and too little on sustainable public finances should note that nothing diminishes their negotiating power like bankruptcy. And they should note further that future employees are far less likely to get anything close to the retirement benefits now enjoyed by those retirees who got in just under the bankruptcy wire.

And a sobering thought for all Californians: Vallejo's bankruptcy could be seen in isolation, Mammoth Lakes' could be seen as a quirk, but bankruptcy in such close succession in Stockton and now San Bernardino is likely to send jitters through the financial community and make credit terms for cities, counties and the state much tougher. It could also make elected officials in other cities struggling with budgets more likely to throw in the towel, shirk their duties as fiscal managers and join the bankruptcy club. That would be bad news for their constituents, and for the rest of a state groping toward recovery.

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