Type: Economics
Pages: 3 | Words: 712
Reading Time: 3 Minutes

San Bernardino filed for municipal bankruptcy after their city budget reduced by 46 million dollars. They filed for this action since they felt that creditors might start taking legal action against them. In 2001, this city had a surplus of about 19 million in its general fund. However, at the end of 2012, it faced a deficit of 46 million in its budget. This problem could have been avoided if the city defined their financial problem well.

According to Peter Ducker, the second step of effective decision-making is problem definition. In this stage, the decision maker must identify the key issues that might be present in a particular situation. Ducker argues that complete definition of a problem helps a decision maker to identify all the relevant facts that may face a particular issue. Problem definition can be applied on San Bernardino’s case in order to know why this city faced financial difficulties. The filing for municipal bankruptcy would have been avoided if San Bernardino managed its pension liabilities well. According to research conducted by the California Public Employees’ Retirement System, pension liabilities in the cities of California of  Inglewood, Fairfield,  San Bernardino, Pomona, Stockton and Vallejo rose  by six percent in the year ended June 30th 2010 to stand at $ 4.3 billion. In 2009, the pension liabilities in these cities were $ 4.1 billion. Currently, the unfunded pension liability of San Bernadhino is more than $ 140 million dollars. CalPERS, one of the creditors that San Bernardino owes pension funds, claims that this city should continue to pay its coffers $ 1.7 million each month. It has tried to block the bankruptcy petition of San Bernardino since it argues that it may be forced to bankruptcy if the city does not pay it the monthly pension payments. This shows that this city would have avoided financial problems if it managed its pension liabilities well.

San Bernardino should have raised their revenues collected from sales and property taxes in order to avoid filing for municipal bankruptcy. Financial analysts revealed that this city pays an annual payment of about $ 28.8 million to CalPERS. This is despite the fact that it collects about $ 29.5 million from property taxes and $ 16.3 million from sales taxes each year. Its expenditures are significant compared to the revenues that it earns from sales and property taxes. The housing market in San Bernardino is very poor. Studies conducted by the Wall Street reveled that three of the five poorest performing housing markets are in California. San Bernardino is one of such markets and it recorded decline in house prices between 2011 and 2012. This led to a decline in the property taxes collected from the housing market in this city. If this city managed to increase the value of its houses, it would have collected more property taxes. High inflation and economic crisis in United States also caused a decrease in the sales tax revenue collected by this city. The municipal council of this city should have formulated strategies that would boost sales in this city so that it would increase the revenues collected from sales tax.

San Bernardino should have imposed strict financial reporting controls while defining their financial problem in order to avoid filing for their bankruptcy. Auditors have revealed that in the past two fiscal years, city accountants of San Bernardino have reported more money in their general fund than they actually had. Auditor’s reports reveal that in the fiscal year that ended June 30, city accountants reported a surplus of 2 million whereas the correct figure was a deficit of $ 1.2 million. The municipal council ended up spending more money that it actually had. If it had imposed strong financial controls, it would have prevented such errors and any frauds that may have occurred.

Overall, San Bernardino’s filing for municipal bankruptcy could have been avoided if this city defined their financial problem well. If they managed their pension liabilities well, they would have avoided the huge pension debt of about $ 140 million. Moreover, if they had raised the revenues that they aimed at collected from property and sales taxes they would avoided having deficits in their budgets. Lastly, if this city imposed strict financial reporting controls, it would have avoided reporting errors and frauds.

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