City Attorney Discusses Bankruptcy
Thursday, February 4, 2010
Should the City of San Diego consider municipal bankruptcy as a possible solution to its financial problems? We speak to City Attorney Jan Goldsmith about the impact bankruptcy would have on the city, and discuss Goldsmith's goals for his second year in office.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh, and you're listening to These Days on KPBS. Although the City of San Diego has managed to approve a budget that closed a $179 million deficit, the city's fiscal health is not out of the woods. In his State of the City speech last month, Mayor Jerry Sanders vowed to address the city's structural deficit, that's the shortfall we face year to year, regardless of whether the national economy is up or down. In order to do that, San Diego must confront some difficult issues like the city employees’ pension and retiree health care benefits, outsourcing of city services and even the dreaded increased fees for city services. One official whose job is to determine the legality and viability of these plans is San Diego City Attorney Jan Goldsmith, and he’s here with us this morning. Welcome.
JAN GOLDSMITH (City Attorney, City of San Diego): It’s a pleasure to be with you.
CAVANAUGH: Now recently you gave a talk at a luncheon of the San Diego County Taxpayers Association, and at that lunch you discussed San Diego’s financial problems and you spoke out strongly against the option of bankruptcy for the city. I wonder why you feel you needed to speak out about that issue?
GOLDSMITH: Well, part of it is I’m the lawyer for the city and if my client needs to file bankruptcy I can give that advice but I don’t think it’s right for this client. It also distracts us from what we really need to do in the city, and the city, unlike the state level, which is a mess—I’ve been up there as a legislator, it’s very difficult to get your hand around the budget that many people don’t even know the names of all the agencies and departments. This city has the power, the option and can take care of the structural deficit, it’s a question of making some very tough decisions. And the more you get into these, what I call the magic potions, bankruptcy, you file bankruptcy and everything will be okay, all the pension obligations go away, or lawsuits will solve everything. God help us if you have to look at the lawyers for solutions. That gets us off into the wrong track. It’s not – those are not solutions. They will make it worse. And in the case of bankruptcy, we’re not even a candidate for it. But if you want me to go through the reasons, they’re pretty simple. Our problem is a pension that was grant – obligations that were made ten years ago and we granted the pensions and didn’t pay for it and actually bought pensions on the layaway plan and now that – now it’s due. And it’s a huge obligation. These are vested pension benefits granted, protected, under the Constitution and our own City Charter and there’s no case in the country in which a municipality has been able to challenge pension benefits successfully in a bankruptcy. Contracts, yes. Contracts are current labor organization union contracts, we don’t want to do that. We have contracts we just negotiated. And then the second thing is the cost is – When Orange County filed bankruptcy, it cost them $100 million, it took 18 months, and that was 20 years ago, and they still had their same pension benefits. There are some benefits of a bankruptcy: good judges, the ability to negotiate. But not in this situation, it would make it much, much worse. Let’s get back on track on what we can do.
CAVANAUGH: And yet we still – we keep hearing that option floated, bankruptcy, from the mayor’s task force, they suggested that perhaps a bankruptcy might be an option. Is this something we should be looking at, though, as a last resort if other measures fail?
GOLDSMITH: No, it’s not even a last resort because it doesn’t address our problem, which is the huge pension costs that we deferred to this generation of taxpayers, and the cost would be immense. As I said, there’s no case in the country that would allow us to do it. If a bankruptcy judge wanted to create new law, it would have to go up to the U.S. Supreme Court. In the meantime, do we pay our $250 million a year toward the pension or not? We can do much more, we have much more leverage outside of bankruptcy. There’s two reasons why people raise bankruptcy. There are three reasons, one is a good faith disagreement with my analysis. I’m sure there are and I recognize that. The second is out of frustration. My God, we’ll just file bankruptcy like you would if you were an individual; cities are different. And the third is leverage. They think, well, you just use that as leverage against the labor unions. We don’t have to do that. It’s false leverage. People think the labor unions hold all the cards. They do not. Under the law, we need to meet and confer with them. When there’s a decision – before decisions are made having to do with labor and terms and conditions of employment, and that’s a good thing. Labor, you do want to sit down with your employees. We have to do that in good faith. But in the final analysis, if we can’t – there’s no requirement that we reach an agreement. They cannot force it on us. In fact, we are empowered from – to break an impasse by imposing what we want to do if we can’t reach an agreement. We hold the cards. We hold the leverage. And there are a lot of things we can do. We don’t need to talk about bankruptcy. We don’t need to litigate for the rest of our lives and spend hundreds of millions of dollars in legal fees. We have – we hold all the cards, as I said, to face up to these tough decisions. Sometimes people want to get off on these little magic potions and tangents. It’s a way of avoidance. Don’t avoid it. There’s some tough decisions that we can make, and we can do it. Unlike any other level of government, local government has the power to actually make things happen.
CAVANAUGH: One last question about the bankruptcy issue. Would the city have to declare itself insolvent in order to declare bankruptcy?
GOLDSMITH: Well, of course, yes. And under Chapter 9 you have to be insolvent which, of course, we’re not. I pointed that out. That’s a financial issue that’s a little bit out of my realm because I’m not the numbers guy but I don’t even think we need to go there because it won’t help us.
CAVANAUGH: I’m speaking with San Diego City Attorney Jan Goldsmith. And I want to remind our listeners, we will be taking your calls if you have questions or comments. Our number is 1-888-895-5727. Now, Jan, let’s go back to the idea of negotiating with city employees on their pension benefits and retiree health benefits. Your office is looking into ways to maybe negotiate some area of that. Hasn’t that been tried before?
GOLDSMITH: Yes, but it hasn’t been looked at at this depth. Let me just give a broad perspective. There’s three ways to address a structural budget deficit, which we have. I think it is about $70, $80 million, and the big crunch on the pension obligations are still facing us. They’re like clouds on the horizon. We need to deal with this. The mayor and the council have adopted a two-year budget so we – and under the representation to the public that we have now 18 months in which to address this structural deficit. Good idea but we got to do it. Usually three ingredients. One, cut services. Two, find ways to increase revenue legally. And three is to cut the cost of producing those services, which is labor. What I talked about in front of the Taxpayers Association was the ways to cut labor costs and costs of producing services. I also promised that in the future I’ll give options on revenue. With regard to labor costs, particularly the pension, one thing we can’t do—the only thing we can’t do—is we cannot touch vested pension rights. They’re protected under the Constitution and, of course, as soon as I say that everybody says, well, let’s go take away their pension rights. We – That’s swimming upstream. But there are a lot of things we can do. Number one—and all of these require a meet and confer with labor in good faith but if we don’t reach agreement, the city can make these decisions. All new employees don’t have vested rights. We could – The city went a nice step and they created what’s called a Tier II pension plan for new employees. You can eliminate it for new employees. You can save those costs. That’s for existing employees. We believe that the DROP program and retiree health provisions for employees, current employees, are not vested and they may be effected by negotiations. There is, under Section 143 of our Charter, our City Charter—we are a charter city.
GOLDSMITH: Our charter is our constitution…
GOLDSMITH: …it’s the highest rule in our land. Charter Section 143 says that our pension system is contributory. We’re partners with our employees and the contributions are supposed to be substantially equal for normal retirement allowances. We don’t think that’s happened. We think that’s an area of negotiation.
CAVANAUGH: I see.
GOLDSMITH: As a matter of fact, the California Supreme Court in 1983 said we could negotiate that. We’re going to have a hearing on March 8 with our pension board coming to the city council to discuss where we are substantially equal and where are we not? We can also—and these are some of the tougher areas. It’s been said that 42% of our labor costs are pension obligations. I don’t know if that’s true, but I assume. It hasn’t been challenged. I assume it’s in the ballpark. That means that 58% of our labor costs are not vested pension benefits. We, as employer, do have control of that. When I had my business in the private sector, I looked at the total cost of employees. We can do the same. Boy, that’s pretty tough, and I wouldn’t want to lose some really good employees. But you can affect the 58%. It’s interesting when I say that people say, well, I’d rather take away their pension benefits. You know something? You do what’s legal and you consider it and you opt – you have to carefully think of it. The other area that we can affect labor cost has to do with managed competition and outsourcing.
CAVANAUGH: I wanted to to ask you about that because you – San Diego wants to reduce its costs by outsourcing some city services. The voters gave the okay to that. Your office says the city doesn’t have to include city departments in that process by allowing them to bid. Now I’m wondering, hasn’t that opinion actually slowed down the move towards outsourcing?
GOLDSMITH: No, not at – not at all. It gives a broader opportunity to outsource. There’s nothing in our charter that requires—or, for that matter, the law—that requires that employees submit bids or departments submit bids. That is an option that could be made. The county has a similar situation where they can submit bids. It’s a good idea, you do have to meet and confer, under state law, with your labor organizations but there is no reason and there’s no language, there’s no requirement that we actually have bids submitted. There’s different ways to compare the cost of the private sector with the current expenditures we have through the public sector.
CAVANAUGH: I see. I’m speaking with San Diego City Attorney Jan Goldsmith. We’re taking your calls at 1-888-895-5727. Let’s take a call now from David in Carmel Valley. Good morning, David, and welcome to These Days.
DAVID (Caller, Carmel Valley): Good morning. Thanks. A great topic this morning. Just had a question concerning, I guess, a possible bankruptcy from the city of San Diego compared to some of the private bankruptcies we’ve seen. I know, for instance, that several of the airlines, for instance, U.S. Airways and Northwest Airlines, when they declared bankruptcy, it did make their pensions completely went away without any vote from the membership. And specifically with Northwest Airlines, they weren’t even insolvent. You know, they did not have to prove any sort of insolvency. Just by going into bankruptcy, they were able to void those contracts. Is there a difference for San Diego because it’s a city or because it’s in California?
GOLDSMITH: Yes, D…
DAVID: Thank you very much.
GOLDSMITH: Yes, David, and, in fact, if I was representing a corporation, I would have a different conversation with my client because they’re under Chapter 11 of the Bankruptcy Act. Chapter 9 covers cities. Our pension benefits for a public entity in California are protected by the California Constitution, very clearly vested rights, and by our Charter. There’s no case in which it’s been affected. One case in Vallejo, the City of Vallejo did file bankruptcy and the bankruptcy judge did void an existing contract and ordered the parties to renegotiate it. Existing contracts are different than pension benefits. The people who are retired and receiving pension benefits aren’t even represented by our labor unions. They have vested pension rights. So there is a significant difference. There’s no case saying that we can do it. It would go up to the U.S. Supreme Court if any bankruptcy judge tended to do it. I don’t think they will and my reasoning is that Chapter 9 was originally enacted during the Depression when there were cities in really bad situations. The original version of Chapter 9 was held unconstitutional by the U.S. Supreme Court on the basis that it violated the 10th Amendment of the U.S. Constitution, essentially respecting state sovereignty. They amended it to respect the sovereignty of the state and the localities and put in provisions that requires essentially state consent. I think that analysis would tend to get the Supreme Court thinking, well, how can we respect state rights when we would essentially order a violation of the state’s Constitution and its – the constitution of the city. I think it’s highly, highly unlikely. Plus, they would open up the floodgates of tens of thousands of cities around the country that would say we don’t like our pension benefits either.
CAVANAUGH: We’ll just declare bankruptcy. I understand your point.
GOLDSMITH: Yeah, I just don’t see us going there. But if it was a corporation, David, I would have a different legal analysis for my client.
CAVANAUGH: Let me ask you a follow-up question on the managed competition side. So your office has found out legally, you’ve basically decided legally that the city departments don’t have to be included in the bidding but you just said it would be a good idea to include them.
GOLDSMITH: Yes. And I do want to emphasize that under state law, whenever you affect terms and conditions of employment, you have to meet and confer in any way – in any event with your labor organizations, and that’s a good thing. So you are inserting their – them into the process. What we do have to do is finish negotiating the ordinance, there must be an ordinance under our Charter, to give effect to this Proposition C that was adopted by the voters in 2006. That ordinance needs to be negotiated. It’s been three years that the city’s been in a meet and confer process. Our office was asked to take this over this month, and we’ve agreed to try to put it together in a timely basis. It is ironic that we’ve been held up by an outside lawyer who was taking control of these negotiations and it didn’t work out, shows that outsourcing may not be good for everything. We’re going to do our best, working with our labor unions, to actually put something in place to allow it to happen and then it’s up to the mayor and the city council to make proposals. If we run into speed bumps and there’s obstacles, the public will know about that.
CAVANAUGH: Let’s take another call. Lana is on the line in Clairemont. Lana, welcome to These Days.
LANA (Caller, Clairemont): Thank you. Yes, my comment was that the – when these contracts were negotiated with city employees, this was some time ago, the public was not aware of these contracts and the voters were not asked if they were willing to foot the bill in the end when the funds that were there ran out for these contracts. And I think that’s the reason why there’s such a momentum to explore bankruptcy for the city because there’s different information out there about what could occur with bankruptcy and how these could be renegotiated. That was my comment.
GOLDSMITH: Hey, Lana, yeah, if you’d take a look at my speech in front of the Taxpayers Association, you can find it on my website, it’s – we have a little thing there. I think there’s a transcript floating around somewhere. I don’t know where it is. But I discussed – Actually, it was – this was all done in public. I read from news articles back in 1996 in which they said the cities and the pension board and everybody involved said this is going to be a burden on future taxpayers. We are giving increases in benefits to our employees and we’re not paying for them now. We’re going to shift them. And they said, this would be a burden on future taxpayers. They bought them on the layaway plan and it was – in the light of day. I guess we just all weren’t paying attention but there were some people who were saying, hey, we shouldn’t be doing this. They did it anyway. And we’re the future taxpayers and we gotta pay the bill.
CAVANAUGH: Well, in that same speech, you ventured into the topic of increased revenues. And I’m wondering if you could tell us what kind of options that the city has for increasing revenues? In fact, because of your city attorney’s office, because of your legal position in this, tell us what are the difference because I think we get mixed up between the idea of new taxes and new fees.
GOLDSMITH: Yes, there is a huge difference in the law, the legal effect. We’re going to be giving some advice on fees versus taxes. There’s – sometimes the line isn’t clear but let me just put it this way. It’s a kind of a simple way of explaining it. When I pay to pick up my – to have my own trash picked up, it’s a fee. But when I’m forced to pay to have your trash picked up, it’s a tax. In other words, I pay for what I use, it’s a fee. But if I’m forced to pay for everybody else, that’s a tax. There are some nuances in the law and all that. We will be looking at fees and we will be giving advice as to what are the options for fees, people using what they – pay for what they use. We will be looking at the history and the impact of the so-called People’s Ordinance on trash pickup. We have – We are doing a very in-depth review of that and I’m discovering some things that are really interesting that I did not know in the history of this. And we are also looking at other options and, of course, it’s up to the city council and the mayor but I – our office will not hold back anything because we don’t – just because we don’t agree with it. We’re going to give the options just like we did with what you can do to deal with the labor costs.
CAVANAUGH: And sticking with the legality of the revenues, the city council can approve a fee but taxpayers would have to approve a tax? I mean, voters would have to approve a tax?
GOLDSMITH: Generally, yes. There’s a Proposition 218 which allows for protests on certain types of fees but generally what you say is correct.
CAVANAUGH: Now your comments to the Taxpayers Association were seen by some people as a change in tone for you. Some thought the comments sounded a little bit more like policymaking than legal advice. What would be your response to that?
GOLDSMITH: Take a look at the speech and the transcript. I was very, very careful to point out that I was setting out options and that I am not the policymaker. And I will, I will – There’s a limit on what I can do but I have a responsibility to try to frame where your options are, to get the discussion off of what’s not legal, like taking away vested pension benefits, or what’s not even close to a legal benefit, to the city of filing bankruptcy onto the things that you can do. And by virtue of being the lawyer, I can say things that maybe are unsayable. I can talk about the trash fee and the People’s Ordinance. And I can talk about these things and outline them. I do recognize that these council members and the mayor have very, very difficult policy decisions. I don’t want to be there. I’ve been a policymaker. I will tell you that when I joined the state legislature in 1992, we faced a, I think it was a, $12 billion budget deficit out of a $50 billion – By the time I left in 1998, the economy turned around, Pete Wilson was governor, we both left, there was a multi-billion dollar surplus. I was mayor of Poway during a recession. Yeah, we made very, very tough decisions. And so I’m not – that’s not why I’m elected but I am elected to speak out and try to give the legal parameters of what can and cannot be done and try to help facilitate the discussions.
CAVANAUGH: Have you been frustrated by what you’ve been hearing in the public discussion about how San Diego can get back on its feet financially? Is that one of the reasons that you’re speaking out about the legality of, you know, taking away pension benefits or filing for bankruptcy? You want to set the record straight on these things?
GOLDSMITH: Not at all frustrated. I understand it, believe me. I was mayor of a city during not only a recession but during the water crisis. I remember the long hearings and people get frustrated. I think the public is frustrated right now, the public is angry because of its very, very tough times. I have no right to be frustrated. What I – what there was, was a void of someone coming in and saying, hey, here’s what we should be doing and what you’re talking about over here, they’re easy fixes in the minds of some but they’re really not, and try to get back to reality because I don’t think we can make these tough decisions in 18 months unless we believe that we have the power to do it and that we require the city to actually do it. At the end of this 18 months, as a citizen of San Diego, I expect our structural deficit to evaporate. And that’s a major undertaking for this city council and this mayor. I can’t make that decision. I can help every way I can by outlining what the options are and try to keep us on track. I don’t have that vote and I don’t want that vote but I do want this problem solved.
CAVANAUGH: What is the single most significant legal option that your office is going to pursue in hopes of helping the city fix its current budget problems?
GOLDSMITH: Well, just to outline the options. You know, what’s my preference is irrelevant. Again, that’s stepping in, that’s going over the line. See, I kind of see where the line is.
CAVANAUGH: Well, then let me put it this way. If you can negotiate some wiggle room in the city’s pension benefits and in the retiree healthcare, that could save the city a lot of money.
GOLDSMITH: I will tell you retiree healthcare is already being negotiated with labor organizations and the city in a cooperative effort to see if we can find some ways that it’d be affordable. If we fail on that, we face an additional $1.3 billion unfunded obligation in the future and we have to do something about that. That is huge. I think it is a terrific step in the right direction to work together on that. I think that managed competition as an option is important. The Reason Foundation did a study in 2007, which they published, which studied San Diego and said that through outsourcing of 13 different services, the city could save between $80- and $200-million dollars. I’m not a numbers guy. I’m not going to stand behind those figures but I will say that the Reason Foundation is – has a good reputation and their report seems to make some sense. And all the voters wanted was a process that lets us see the light of day. I likened in my speech to my position on managed competition as negotiating this similar to what we did with the seals. When I took office, we had orders of one judge to remove the seals and reconfigure that beach at millions of dollars of cost. And another judge, a federal judge, saying don’t touch the seals. And we were kind of in the middle. And I don’t – didn’t care whether the seals were removed or not, it’s not an issue. I’ve never been on the beach. But as a lawyer, I wanted my client, the city council, to make that decision so we pursued legislation to allow the city council to make that decision. It’s the same thing with managed competition and outsourcing. Whether something’s outsourced or not is not my issue. But it should see the light of day in front of the city council and – for determination, that’s who makes the decision on whether to outsource something.
CAVANAUGH: We’re out of time.
CAVANAUGH: But I want to thank you so much.
GOLDSMITH: Well, it’s my pleasure.
CAVANAUGH: I’ve been speaking with San Diego City Attorney Jan Goldsmith. Thanks for coming in.
GOLDSMITH: Thanks for having me.
CAVANAUGH: And if you’d like to post a comment on what you hear on These Days, go to KPBS.org/thesedays. Coming up, a discussion about the trouble with Toyota. That’s as These Days continues here on KPBS.