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Part 2: Is bankruptcy in the city’s future?

The high-stakes showdown the city of San Diego has been waiting for has finally arrived in a local courtroom. The city is asking a judge to decide whether pension hikes granted to city employees in 1996 and 2002 are legal. But those hoping for a quick solution to the city's looming pension crisis may be disappointed. KPBS Legal Reporter Amita Sharma has more.

When it comes to the retirement increases handed out to San Diego workers in 1996 and 2002, both the city and unions say the state constitution backs their positions. California law requires the city to maintain a fiscally healthy pension plan. And City Attorney Aguirre says the council and the pension board ran afoul of that law when they reduced the city's contribution to the plan while increasing benefits. Aguirre says the benefit boosts also violated city rules.

Aguirre: The city charter requires that any debt that's created has to have an identifiable source of funding. One generation can't create a massive debt for goods and services they've already consumed and then have the next generation pay for it.

Aguirre hopes Superior Court Judge Jeffrey Barton will see it his way. But labor attorney Christopher Platton says Aguirre doesn't have a prayer.

Platton: The likelihood that a court will roll back public sector pension benefits that have been put in place by an appropriate legislative act by the city council of San Diego is slim to none.

The reason, he says, is because the state constitution protects employee contracts.

Platton: The courts have been very clear in a series of cases over the decades that those benefits cannot be disregarded or reversed absent either replacement of the benefits with benefits of similar value or absent some truly exceptional circumstance which does not appear to be the case in San Diego.

Whatever happens, the case is likely to make its way through the appeals process, and may even end up before the state supreme court. The process could take years.

Meanwhile the meter is running on San Diego's fiscal mess. It has a $1.4 billion pension shortfall which accrues interest at a rate of $100 million annually. It's paying an extra $90 million on ballpark bonds because it can't refinance them. San Diego does not have the half billion dollars it needs to fix potholes, update its water system, pay for a fire station or build libraries. And the city is shelling out tens of millions of dollars on legal and consulting fees.

Enlich: You add all that up and there is simply no way we can continue as America's finest city and pay those obligations. It can't be done.

Scott Ehrlich is a professor at San Diego's California Western Law School. He says the city should use the threat of bankruptcy to prod unions back to the table to negotiate decreases in retirement benefits. Ehrlich says San Diego simply can't be a fiscally responsible and continue to meet its financial obligations.

Ehrlich: And so the union doesn't really have a choice. It either has to renegotiate these contracts or it may find itself in bankruptcy court where the city has the right to completely reject the outstanding pension obligations and continuing contracts and renegotiate them in bankruptcy court.

Ehrlich contends San Diego is no different from an airline that can't pay its bills. The airline files for Chapter 11 and uses the power of bankruptcy laws to reject burdensome agreements.
But lawyers for municipal employee unions like Christopher Platton disagree.

Platton: The city is not like a corporation. The city is not like United Airlines, or Northwest Airlines or a steel company in the private sector who can go out of business. The city of San Diego cannot go out of business.

But the city is having a hard time running its business. Aguirre told a judge last week, San Diego doesn't have enough money to make what could be a $300 million payment into the pension system. That means even more belt tightening and layoffs are in store.

And relief is beyond reach. The city is still locked out of the bond market because it's fallen three years behind in releasing financial statements. Despite that dire picture, city officials have ruled out bankruptcy for now. But the debate continues.

Some say bankruptcy would be a good way to get rid of its current financial obligations and improve services to the public. Others say bankruptcy is no shangri-la. But it is an admission of failure and few want to be the one who say that's what happened at city hall.
Amita Sharma, KPBS News.

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