Should The City Of San Diego Consider Bankruptcy?
Wednesday, November 17, 2010
With the city of San Diego facing an ongoing structural deficit and no additional sources of revenue on the horizon, there are renewed calls for the city leaders to begin exploring the option of bankruptcy. We'll hear arguments for and against filing for municipal bankruptcy.
With the city of San Diego facing an ongoing structural deficit and no additional sources of revenue on the horizon, there are renewed calls for city leaders to begin exploring the option of bankruptcy. We'll hear arguments for and against San Diego filing for municipal bankruptcy.
KPBS Political correspondent Gloria Penner
San Diego City Attorney Jan Goldsmith
Former San Diego City Attorney Mike Aguirre
MAUREEN CAVANAUGH: I'm Maureen Cavanaugh, and You're listening to These Days on KPBS. Economic hard times are forcing many families and businesses to make hard decisions, sometimes choosing bankruptcy when they see no other option. With the City of San Diego facing an ongoing structural deficit and no additional sources of revenue arriving, some people are saying bankruptcy should be back on the table as a painful but perhaps necessary option for the city. Before we begin a discussion with advocates both for and against the option of bankruptcy, I'd like to introduce my guest, Gloria Penner.
GLORIA PENNER: Good morning, Maureen.
MAUREEN CAVANAUGH: Why is the issue of bankruptcy for the City of San Diego, heating up again.
GLORIA PENNER: When Proposition D failed, and Prop d would have increased the city sales tax by half a cent, and it also had some fiscal reform as part of it, it would have eased some pressure on the city's deficit bottoming that's been going on fair while. San Diego's former city attorney, and a well known advocate for bankruptcy raised the idea a couple of years ago, and he raised it again after Proposition D fell. He said that the collapse of D shows that the city meets the key test for municipal bankruptcy. It is insolvent, and the cuts to the city services that the mayor discussed even before Proposition D, police officer cuts, firefighter layoffs, reduced park maintenance, closed rec centers, pools, libraries, when you put it all together, Aguirre concluded that the city is insolvent when it can't provide essential services, and just to add to that, yes, the city is in bankruptcy, and city attorney Jan Goldsmith is opposed. But last year, a task force of business leaders lead by business man, Vincent Mudd, said bankruptcy was an option in a report that they made on city hall finances. And then the city council grand jury said that bankruptcy should be considered. So the word is out there now, and we'll see what happens.
MAUREEN CAVANAUGH: And just one quick question before we get former City of San Diego attorney, Michael Aguirre on the line, and that is, when we say the city faces a structural deficit, what exactly does that mean?
GLORIA PENNER: That means that the city is set up to spend more money that happen it takes in. Simples that. A structural deficit is a chronic, long-term budgetary problem that's built into a financial system. Could be because of mistakes that have been made in the past, but even at economic heights when there is no recession there are problems balancing the budget. And solving this problem requires that the government change policies, either reduce spending, raise taxes, sometimes both in the long term, and we definitely have a structural deficit. We can't blame the budget entirely. We have to blame it on the fact that we are a low tax city, we're underfunded compared to other large cities in California, and that in addition to that, what we have is when you hook at what we spend and what we expect from the city, it doesn't match up. We don't have enough money coming in to take care of what's going out.
MAUREEN CAVANAUGH: Well, on the line with us now is one of the strongest voices in favor of San Diego filing for bankruptcy protection, former San Diego City Attorney Mike Aguirre. And Mike, welcome to the show.
MIKE AGUIRRE: Good morning. That was an excellent summary.
MAUREEN CAVANAUGH: Well, in a news conference earlier this month, you renewed your push for the city to file for bankruptcy. What benefits do you say the city would get immediately upon making that filing of bankruptcy?
MIKE AGUIRRE: Well, first, what's driving the problem are the benefits, the council had authority to create pension benefits but they didn't have the authority to create pensions outside the charter. So most of the problem was things like retroactive or what we call ex post facto benefits, free pension credits, changing and rigging the system to a point where it pays $300,000 pensions. The bankruptcy, what it would allow us to do is to present a plan, it would allow us not to recognize pension beneifts that were created illegally outside the charter, it would put the burden on the pensioners and the union to come in and show why they're entitled to free credits, why they're entitled to the excess pension benefits we've identified in the various reports, and the of it is that we could present our plan with the protection of the Chapter 9 bankruptcy proceedings, and it would relieve us of having to make the pension payment, and the pension payment this year is gonna be $250 million, in that vicinity, this would allow us to shrink that pavement down to the point where we would not have a deficit at all. In bankruptcy don't have to sell city assets, you don't have to cut city services, it allow us for a city to have an opportunity to discharge these contingent claims, and I was not in favor of bankruptcy as city attorney until the very end, but where we are right now, people are reading the paper today, we can't get our familiar reports out anymore, the budget cuts that the mayor announced during his budget briefings were so draconian and so severe that that is essential he the case for insolvency. And this is a way that -- this is why municipal bankruptcy was created to gip with. The quick answer to your question is, it immediately relieves the city of its deficit problem for this year, it allows for a plan to go forward, it's what stays do, like San Diego, Orange County did it several years ago for a similar type problem, and we could take advantage and get this problem behind us, we struggled with this for year, and the plan is worse today than it was when mayor Sanders took office.
GLORIA PENNER: But mike, no city has successfully changed pension plans through bankruptcy. What's different about San Diego?
MIKE AGUIRRE: Well, what's different is these pension benefits are not vested. And that's the issue. Many of the people what are opposed say, well you can't do something about a pension benefit that's vested. The whole point here is that we have all of -- we have the SEC, and several expert attorneys, including the pension board's own attorneys who said these pension benefits were created illegally. If they were created illegally, then they don't vest. And law doesn't enforce illegal contracts, which is what these are. We have cases pending right now making those assertions. So the so the idea that San Diego is unique, it is unique. But there's many cities like San Diego. There's a city down in the South called Pritchard Alabama, I've been on the phone with them, they're gonna be doing exactly this. They're gonna be doing what's call aid prepackaged reorganization. So in San Diego, we're the only city in American history this the SEC found engaged in knowing fraud in connection with their pensions, and for which the city officials were penalized, had to pay penalties the first time SEC history that they've imposed penalties on city officials, so San Diego is both unique in the sense that we had these pension benefits created on the authority of the council to create them, but it's also part of a larger national problem. And you're going to see cities across the United States doing this.
MAUREEN CAVANAUGH: Now, Mike, excuse me, but wouldn't filing for bankruptcy destroy San Diego's credit rating Again?
MIKE AGUIRRE: Just the opposite, what we would do is make it clear that we are affirming all of our debts, all of our bonds, every other obligation that we have, and that this would actually enhance our ability. Think about where we are today. We have a pension problem that is worse today than it was when we first to the in trouble, this has to signal to the investment markets that San Diego is not doing an effective job of managing its problems, we can't even do our comprehensive financial reports anymore as the reports in the papered it. So what this would say to the market, we, here in San Diego are gonna get rid of this massive pension albatross around our neck, but at the same time, we're going to affirm and confirm as part of our plan, every single penny of any debt that we know of our bonds.
GLORIA PENNER: But Mike, it's clear that the mayor and the city council had no stomach for bankruptcy, so what would put the city on that path?
MAUREEN CAVANAUGH: What they have no stomach for is cutting the pensions. And I know that's hard to accept, but you have to understand, all of the people who are involved except Carl DeMaio have big time pensions coming. Jerry Sanders has a $93,000 pension that's gonna increase when he retires, the council members get to retire whatever age they want, we have council members that have retired age 35, their political supporters, every police officer that retires, every firefighter that retires, every upper echelon of the city attorney's office, they staff, they all retire millionaires, and that's the thing the people have to understand. We're talking about $300,000 pensions. Librarians getting 215, 230 thousand dollars. These pensions are so high that they violet the IRS rules on how much you can get on a pension, then they create another pension that they create out of the city budget on an annual basis called the preservation of benefits pension. And that's what the problem is. We as a city cannot afford to pay people hundred thousand dollar pensions that increase every year by two percent. We don't have that kind of financing.
GLORIA PENNER: Okay, but, can a bankruptcy actually impact employee pension benefits that are guaranteed or protected by state law? In other words, can a judge override state law?
MIKE AGUIRRE: Absolutely. And every single bankruptcy, the they override contracts. That's the whole point. But we have a unique situation in San Diego. We have the claims that the benefits were never vested to begin with. There are real, live claims out there that are still pending in court, including the pension boards' own attorneys, these pension benefits were not created legally, the city council cannot create a pension benefit contract that's enforceable against the city unless it does so with the vote of the public if they're gonna use debt. And what the council members did is they paid their request -- one year's employment cost with the next year's tax money. You can't do that, that's called a violation of the liability limit law. There's also arguments that my friend, Jan Goldsmith, are making about other ways to reduce it, and my goal today is not just to convince the people that are listening to me that may not have made up their minds, but I am trying to convince Jan Goldsmith. And I do -- I know right now he's opposed to it, but one of the things that he's raise --
MAUREEN CAVANAUGH: Well, let's see how far you've got along those years. We have to wrap it up with you right now, but I want to? Thank you so much Mike Aguirre.
MIKE AGUIRRE: Okay, thank you.
MAUREEN CAVANAUGH: Former San Diego City Attorney. And on the line with us now is the present San Diego City attorney Jan Goldsmith. Good morning, Jan. Welcome to These Days.
JAN GOLDSMITH: Pleasure to be with you.
GLORIA PENNER: Okay, Jan, so listening to what Mike Aguirre had to say, is it legally possible for a city to reduce pension benefits through bankruptcy?
JAN GOLDSMITH: Well, I wrote an ad that would appear in the UT on Sunday, but in my view no, but it is a question that would have to go up to the Supreme Court, as to whether it preempts the California constitution and our local charter, which is our constitution. It would be very expensive, and once more the city doesn't qualify because it's not insolvent. But let me just pivot, because I just want to point out I agreed to debate Mike for about a week, I set out my view on bankruptcy and the pivot and to really seriously addressing our situation with pension and budgets. So this is kind can have the last discussion I'm gonna have on bankruptcy, it's nonsense, and not only would it get the city into a quagmire and be expensive, and have to test the city going into Supreme Court for years, we don't need it because we have extraordinary power on the local level that other cities don't have. Carl DeMaio came up with a plan that includes a lot of different options for fixing this pension problem. And they honestly fall short of abrogating vested pension benefits. Once more one thing that we have made very, very clear is the process for labor negotiations upon an impasse, the city council gets to decide which means the management holds that cards. There must be good faith negotiations, and that's a good thing --
GLORIA PENNER: But I --
JAN GOLDSMITH: But the city has really in the past not recognized their own power. We need honest negotiations then we need the will to take the tough medicine. With that regard, I agree with Mike. Tough medicine has to be applied.
GLORIA PENNER: Okay, but this option, the bankruptcy option, I don't want to let that drop yet, but we will try to get onto some of the other issues, this wasn't only recommended by Mike Aguirre, a prominent task force that was formed by mayor Sanders recommended it as an option. The San Diego county civil grand jury recommended that the city consider it as an option. Why not lay the ground work for this to be one of the options?
JAN GOLDSMITH: Because it's nonsense and it's not an option. I laid it out on Sunday. Vince Mudd, I met with his group after they issued their report, they had not consulted with anybody. I invite you to ask Vince Mudd and the people involved in that group today. The grand Jury, the same thing. They didn't discuss it with me or any of the lawyers. It's a -- bankruptcy is attractive. So I liken it to the way the City has avoided this pension problem from day one years ago. First denial then avoidance. And then they were waiting for miraculous investment returns are gonna save the day. Those things don't pan out. There's no magic potion that you can just apply.
Now bankruptcy's the easy fix. Mike says file bankruptcy and the problem presto goes away. Well, it's never happened in the history of our country for a public pension. Private pensions, yes, Chapter 11. But chapter nine has a history of respecting states' rights under the tenth amendment of the U.S. constitution. Again, and so there's a legal issue there, and I'm on the side of states' rights. And I have explained my reasons.
MAUREEN CAVANAUGH: Well, Jan, you base much of your proposals to get San Diego out of financial trouble on winning a lawsuit you filed to try to reduce the city's pension obligation for retiring healthcare benefits. I want to know how far along are we with that lawsuit? And how long can the city wait?
JAN GOLDSMITH: Sure. Let me also say that Mike makes reference to illegal benefits. We are challenging those benefits, whether they are legal or not, in state court. He made challenges that were unsuccessful. They may be up to the appellate court. We've made some challenges to enforce the charter. What we focus is on enforcing the charter. The value of legal cases, court cases, is to test -- test legalities and to test what options you have. The ultimate decision has got to be made by the city council and what their options are. It is much faster to implement a plan somewhat of the nature of DeMaio's or something that's put together than to wait years for legal cases to wind their ways out through the Courts.
MAUREEN CAVANAUGH: Right.
JAN GOLDSMITH: However, we will have a hearing on our contribution case, substantially equal case, in February which will get a really good sense from the judge. We had one legal -- one hearing last month in which the pension board tested the legality, the legal basis for our theory that employees in the city must have substantially equal contributions, and we won that. So now it's gonna be a final decision should be made in February.
GLORIA PENNER: Talking about the mayor and the city council, and what they may or may not do, what sign do you have that this mayor and this city council will enact changes and reforms that other elected officials have been unwilling or unable to do for decades?
JAN GOLDSMITH: Well, you know something, that's where people like Mike and others in the community and keeping a focus on it to ensure that we do have to face up to it. We will be getting in next month and in December, an updated projection of what the annual required contributions will be over the next 15 to 20 years from the pension board. That will have the debate even further. I think debates and discussions and putting people on spot, what can we do, will help. And that's the -- you know, in a representative democracy, that's what you do. Of I think that is very helpful. But I will tell you, the City Council and the mayor have a plan in front of them. I know labor organizations have some ideas that ought to be considered. It's not -- we need to focus on it. We need to stop the denial of it. Of.
GLORIA PENNER: I'm sorry, can we trust, for example, about $6 billion in property taxes that will not flow directly to the city's operating budget for police and fire and city services instead of -- they're gonna be kept downtown to fund construction, like a Chargers stadium? And that was the result of a closed door deal that very few people knew about between CDC -- CCDC, the legislature, and very likely some others. How can we trust when things like that happen?
JAN GOLDSMITH: You know, it's not a matter necessarily of trust. It's a matter of accountability. And making voices heard, and these are people involved who represent the voters. And the residents of San Diego. And they are the trustees for the will of the people. My role is trustee of the legal analysis and the legalities and defending of the law. And that's why I was hired so that's where I will say, look, here are all your options of here's your power, which I keep emphasizing of they've got the power to do it. I can't jump into the policy and say here's what we should do. And you know, I guess unless I'm asked, but that's not my role. That's where Mike and I disagree as far as the role of city attorney. I will show them what the process is, I'll show them they have the power, and bankruptcy is nonsense of that's not one of the options. But there are so many others. It makes no sense to be debating over bankruptcy when --
MAUREEN CAVANAUGH: Okay, Jan I want -- one last quick question for you. If San Diego is not insolvent, why are we not releasing our financial reports on time?
JAN GOLDSMITH: Well, according to the mayor's office, there was a computer problem. I believe that to be true because we don't get our financials for our department. And as a result of that not having reliable financial's on the day to day basis due to the computer problem, we cannot get that information to the auditors, the auditors captain certify it. I will tell you that I have communicated with our disclosure council as to what to do, we have posted on the website of the city, a disclosure of this. I do want to correct something that Mike did say, and he says this often, but he says that the SEC found that the city was engaged in knowing fraud in connection with pensions. That's not true. The SEC found the city failed to have proper disclosure in disclosure documents to investors with bonds, years after. And what they found is that the city doesn't disclose properly that there was a problem. We have outside disclosure council, when something like this comes up, the big danger is, have we disclosed this to investors that our financial odd identities are gonna be late? The answer to that is yes, we are disclosing it, we've made contact with all of the, you know, the proper parties, and this is not something anywheres near like that. Of but I wish we had gotten our audits in place.
MAUREEN CAVANAUGH: Well, I want to thank you so much for joining us this morning. San Diego City attorney Jan Goldsmith, thanks.
JAN GOLDSMITH: Thank you.
MAUREEN CAVANAUGH: And Gloria, we only have time for a couple of wrap up questions, but you were asked, I think by Jan Goldsmith during this conversation about Vince mud, he was the chairman of the business task force that last year advised San Diego City leaders to prepare to file bankruptcy. And he said we should hear what Vince mud has to say about the matter today. You actually --
GLORIA PENNER: I did ask Vince Mudd, and Vince and I try to get together by phone. And we ended up doing it by voice mail, but it was a very long voice mail message from him, and I did write it down, just about word for down. And what he says is that the constitution grants interesting benefits to people, and interesting rights. One of the rights is the ability for people in municipalities to file bankruptcy. It's a constitutional right. So it's reasonable for cities to understand its options for this city. Of something the city should have explored a year ago of he's sticking my that. So now after Prop D, the city is exploring its options once again. The challenge is, you have to understand the options and it would be good for the public to understand what qualifies as insolvent. And if you can't qualify as insolvent, it becomes a narrower conversation. He said that Jan Goldsmith says we are not insolvent. Vince said he doesn't know if Jan Goldsmith is right or wrong.
Now he mentioned that the city of Valeo elected to file bankruptcy. This is the important part to do that, the council and the mayor had to agree. That's the second test. Does the elected body agree that they want to explore bankruptcy? So our mayor, city council, and city attorney says no, it stops there. There's the philosophical question -- should be, chapter nine should be an option. It's a constitutional right. But you have to answer the insolvency question, and if the elected officials want to file, and if thigh don't want to file, if they said no, then it's a moot point and that's what Vince is saying. It should be an option but because they don't want to file, it's a moot point.
MAUREEN CAVANAUGH: Gloria, thank you so much, we've gotta leave it there. I want to thank Gloria Penner. She is KPBS political correspondent and host of San Diego's Roundtable and San Diego week. Thank you.
GLORIA PENNER: Thank you.
MAUREEN CAVANAUGH: And I also want to thank our two former guests, former San Diego city attorney Mike Aguirre, and Jan Goldsmith, current San Diego city attorney. Coming up, new recycling rules for San Diego, that's as These Days continues here on KPBS.
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