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Part 1: Is bankruptcy in the city’s future?

Most San Diegans are familiar with the number "$1.4 billion" - that's the estimated pension deficit, but that number will grow bigger tomorrow.

The pension board will update the estimated deficit, and announce the amount the city will have to pay into the fund this July. As San Diegans wait to learn how much money is left to run the city, some are reconsidering if bankruptcy is in the cards.

In the first of a two-part series, KPBS reporter Alison St John takes a look at the question.

The city of San Diego is still laboring through stormy seas, with its new captain, Mayor Jerry Sanders at the helm. His first mate and chief executive officer, Ronne Frohman, was formerly San Diego's Navy Mayor. Frohman used an unfortunate turn of phrase earlier this year while explaining the changes they were making at city hall.

FROHMAN: "We're putting a leadership team in place , and then after we put in that in place, then we will move the deckchairs around under each of the leaders."

The reference to moving deckchairs raised the inevitable question of whether Frohman had the image of the Titanic sinking somewhere deep in her subconscious as she considered San Diego's future.

City leaders are battoning the hatches and preparing for a stormy budget season.
Councilwoman Toni Atkins , who chairs the city's budget committee, says she doesn't know how the city is going to avoid drastic cuts in basic services this year.

ATKINS: "We already felt them last year and we managed to piece together bits as and pieces of money to keep a pool open here and a library hours extended there, we've used all our additional resources. I don't know how we're going to pull that rabbit out of the hat this year to be honest."

Mayor Jerry Sanders didn't make the magic trick any easier this week when he announced yet another billion dollars in debt for employee medical costs. He has had little success in bringing the unions back to the table to renegotiate benefits and he's promised not to ask citizens for more taxes until he's streamlined city hall. So far he appears to have hired more people than he's fired. But the mayor says bankruptcy is not on his agenda.

SANDERS: "Well, I would say that we're not at that point."

The mayor is being open about the enormous problems the city faces.
Attorney Pat Shea, who ran for mayor on a platform of using bankruptcy to solve the city's problems, says the only way the city has avoided bankruptcy so far is by hiding the truth. He says as the truth emerges, chapter 9 bankruptcy will be the best option.

SHEA: "In 2002, they definitely would've been in chapter 9, if they didn't cook the books, so it's cook the books or go into chapter 9 and deal with your problems."

Shea says even if the city skates by this year, the hundreds of millions of dollars owed the pension fund each year will only grow as the years go by.
But the pension board's outside fiduciary counsel, attorney Harvey Leiderman, says if San Diego does decide to try chapter 9, a judge will probably rule the city doesn't qualify. Leiderman says even if a city's debts or liabilities are enormous, it cant simply go out of business like a corporation. To qualify for chapter 9, a city has to prove its revenues can't meet its day to day expenses.

LEIDERMAN: "I think it's doubtful from what we know of the city's financial condition today that the city could prove that it is unable to pay it bills today as they come due."

Leiderman says that's because the city hasn't exhausted its revenue options.
However, the members of the city's pension board aren't taking any chances. Liederman briefed them last week on how a hypothetical city bankruptcy would affect the pension system. He says retirees would still get their benefits. But he says the city might opt for bankruptcy because that would make it easier to cut back benefits promised to current employees."

LEIDERMAN: "I can only assume that somebody who wants to put the city into bankruptcy would have that as their goal."

That is the goal of City Attorney Mike Aguirre, who's in court this month doggedly pursuing his strategy of trying to roll back benefit increases he says were illegally granted. Aguirre says, in his opinion, if he can't roll back the benefits in court, the city will be forced to declare bankruptcy. He bolsters his argument by pointing out it's politically impossible to raise taxes. He also rejects the idea the city could solve its financial pickle when it gets back into the bond market, by doing what San Diego County did - borrowing more money in pension obligation bonds.

AGUIRRE: "The County model is not a good one because now they have massive pension obligation debts and at the same time their unfunded liability is back over a billion dollars so the road that the County went down what they're showing us is that that doesn't work."

The city's coming budget is where the rubber meets the road. San Diego city's new assistant auditor Larry Tomanek puts it in stark terms.

TOMANEK: "The bottom line is the city has to live within its means, if it only has 'x' revenue, it can only have expenditures. Now whether taxpayers want to give more money that's a question for the council and a question for the taxpayers."

The city's chief financial office, Jay Goldstone crunches the numbers. He says the city paid $160 million to the pension fund last year, and tomorrow's announcement could well raise that payment to more than $200 million, though no one knows by how much.

GOLDSTONE: "If we were forced to have to find an extra $100 million on a $900 million budget, approximately ten of cuts and you know sworn personal and public safety are not going to be reduced, now all of a sudden you're looking at a 25 percent cut of everything that's left. That will be draconian. After Friday, we will have a better sense if that's the magnitude of the problem."

As San Diego navigates uncharted waters, it remains to be seen if the pension deficit will tip the city into bankruptcy. The future is still over the horizon. Alison St John, KPBS news.

*Tomorrow we take a look at the legal battle to avoid bankruptcy.

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