There were a lot of interesting people eating eggs at a breakfast panel Thursday.
The city's firefighter and police unions had leaders there. Prominent conservatives and business leaders were there along with a few members of the mayor's secret kitchen cabinet including retired shipbuilder Dick Vortmann and restaurateur Dan Shea. The city attorney, Jan Goldsmith, was there. Progressive activist Norma Damashek listened as did libertarian activist Richard Rider, who chatted afterward with someone from the Reason Foundation.
Lawyers were peppered through the audience.
But one team was conspicuously absent: the mayor and his staff. They were probably too busy. But they've been avoiding the discussion that was going on Thursday for four years -- it would not have been out of character for them to avoid it one more time.
What was everyone there to hear? A frank, informative and very interesting discussion about municipal bankruptcy.
And yet, neither the panelists, nor the moderator -- accountant and former chairwoman of the Pension Reform Committee April Boling -- said a word about the city of San Diego.
That was a good idea. Every time, since 2004, that the issue of bankruptcy has been discussed at all seriously, it has devolved into a discussion about the San Diego's particular position. But San Diego is just one city in this county. When you look at places like Chula Vista, where two years ago the city manager said they were on the path toward insolvency, it's not hard to see how many people will want to know more about this procedure.
The point of the breakfast was to understand what a municipal bankruptcy proceeding would entail and if what we think it is really what it is. And the panelists were perfect: Retired Judge John Ryan, who oversaw Orange County's 1994 bankruptcy case (and who was the subject of our Saturday Q&A); Margaret Mann, a bankruptcy attorney at Sheppard Mullin; and Ali Mojdehi, another lawyer from Baker McKenzie.
Let's get into it and review a list of statements -- they might be myths, theories or just plain uninformed declarations. But are they true? Let's test them against what the panelists said.
True or False? Bankruptcy is a choice.
True, it is a choice.
What city officials do is look at their situation and ask themselves whether they will be able to continue paying all the bills the city owes. The city owes money to investors who lend it money and employees who work for it, among other lesser obligations.
If a city is coming close to a position where it won't be able to pay back lenders or make good on employee contracts, it can ask a court to declare it insolvent.
Ali Mojdehi said there are basically two factors a court considers: Whether a city is unable to pay its debts (or whether it will be unable to pay its debts) and whether it has no reasonable way, outside of bankruptcy, to negotiate with the people it owes money to change those debt obligations.
"That is really the first theater of consternation between those who oppose bankruptcy and those who are siding with it. It's a fight over whether or not a municipality is insolvent," Mojdehi said at the breakfast.
True or False? By its very nature, a city can't be insolvent because it will exist into perpetuity and can either cut services or push its debts out to the infinite future because it will be around in 100, 200 or 300 years. It's therefore never going to be at a point where it can't make good on the most immediate of obligations.
This was one of the most interesting themes of the conversation.
Margaret Mann answered it best. Yes, a municipality can push its debt off years, even centuries into the future. But a dollar now is worth far more than a dollar in 350 years. Creditors and employees need money now.
And if a city is in bad enough shape, cutting and cutting until its back in balance will leave you with an untenable situation:
"If you really take the hypothetical out the whole way, you are going to end up with a city with no services," Mann said.
In other words, the municipal bankruptcy option is codified in law precisely to protect a basic level of services residents might expect their city to deliver. If city management has left it so imbalanced that it will have to eat into core public heath, safety and infrastructure services to make good on its debts, the bankruptcy option is there as a last resort to right the ship.
"The premise is there needs to be at least a modicum of services that a municipality provides its citizens. How much it is, you can debate those kind of issues. But I don't think you can debate some of the fundamental needs," Mann said.
True or False? A city would have to prove that it has tried to raise taxes and cut as much as possible before a judge would accept an insolvency claim.
Mojdehi said that there was no technical requirement for the city to have tried to raise taxes before a judge will declare it insolvent. Nor was there a requirement to have negotiated with creditors or labor unions.
And he went on to describe the situation in Vallejo, the Northern California city that started the bankruptcy proceedings last year and won a judgment that it was insolvent.
"In case of Vallejo they did engage with the unions for a considerable period of time. They did, in fact, enter into a Band-Aid solution with their unions that enabled them to meet their obligations for a year. But they finally came to the point where they were going to run out of cash in the matter of a couple months so they made the decision after taking all of those preliminary steps of cost cutting and engaging with their creditors to file for bankruptcy," Mojdehi said.
True or False? A city in bankruptcy proceedings would be beholden to a judge who could raise taxes, sell land, cut services or even change the city's laws and structure. The city's elected representatives would be subservient, therefore, to an appointed judge.
This was a fascinating part of the discussion that came up in various ways a couple of times. It was made very clear how limited the power of the judge is -- he can do none of those things. On the other hand, saying he has no power over them is like saying the president has no power over the legislative process. The president, in fact, has a very powerful tool over legislation: He can veto it.
What became clear was this: The judge presiding over a bankruptcy has to make determinations about what is brought to him. So, for instance, a city can simply reject one of its agreements with unions and a judge might have to declare whether to uphold that or not.
But what is most likely to happen, the panelists all agreed, is that neither the city nor its labor groups will want to risk leaving it all up to the judge and they will work to forge an acceptable agreement before that -- a plan the judge is likely to approve.
Can the judge force the city to raise taxes, sell land, raise rents on property it owns or restructure the governance?
No.
Mann:
"Basically the bankruptcy judge serves as the referee for the game which is played by the participants before the court. What the judge can do is ... rule on the contested matters that are brought before the court and those include, most importantly, the plan which is 'What are you going to do with these troubled affairs of the city.'"
Judge Ryan basically agreed but Mojdehi said he was being modest.
"The reality is that the court plays an extraordinarily important role as the director of the symphony. The symphony director doesn't play any instruments but he or she does manage the process to achieve an equitable resolution," Mojdehi said.
True or False? A bankruptcy proceeding means millions of dollars to the lawyers who shepherd it through.
Without question, this is true. Mojdehi said that Vallejo has shelled out $5 million to lawyers so far and the process is far from over.
What's more, the lawyers have a priority claim on their fees. In other words, under a bankruptcy proceeding, everyone to whom the city owes money basically hires lawyers and get in line to jostle for their fair share of whatever pie is left.
Mann said that the actual administrative costs of the bankruptcy proceeding along with the basic costs of keeping the city operating are the top priority in that line.
"The process has to carry itself," she said.
The question is whether this major expenditure is worth it.
The city of San Diego is pretty well acquainted with handing out massive fees to consultants and lawyers it thought were helping to bring it financial stability and credibility. Taxpayers gave Kroll Inc. more than $20 million to research and write a report about how bad things were here.
Unsurprisingly, the lawyers on the breakfast panel were supportive of that kind of expenditure to help a city restore itself.
"Restoring financial health is something that is, needless to say, expensive. But the question I think that is better asked is: 'If you don't restore financial health, what is the cost of that?'" Mojhedi said.
Mann and Ryan agreed.
"How are you going to resolve a billion dollars of claims inexpensively? The key is to have good attorneys and it's important. In the Orange County case, we had wonderful attorneys and the county was smart enough to listen to those attorneys," Ryan said.
Can you avoid the cost of these attorneys? A sort of do-it-yourself bankruptcy? That brings us to our final theory, of which I'm a prime purveyor.
True or False?The city of San Diego and others have the opportunity now to avoid the cost and combativeness of a bankruptcy by convening stakeholders to negotiate across-the-board sacrifices that will put us on a healthy and sustainable trajectory.
This is, of course, my basic theory: the city's stone soup. Nobody individually can solve the city's problems but if we each put something in the pot, we can make a good soup.
We can't deal with this problem by looking at individual issues: raising parking meter costs here, cutting an employee benefit there, etc. We have to look at the city as a whole, convene everyone and agree to reasonable revenue increases in exchange for reasonable and significant employee benefit reforms.
So the question came up at the panel: Can't we just do this on our own without bankruptcy?
Mojhedi said yes and no. There are really two things bankruptcy provides that normal negotiations don't: One, you can tear up agreements with employees no matter what anyone says about them being vested benefits or not. And two, you can negotiate lower rates with lenders, a process that is difficult if not impossible outside a structured bankruptcy. Sure, in normal times, you can refinance loans, but if you want to negotiate with a particular lender without refinancing and those associated costs, you are out of luck.
"The bankruptcy process enables you to achieve a collective solution hopefully by consensus but it's very difficult outside of bankruptcy -- particularly if you have a complicated balance sheet to deal with multiple constituencies," he said.
So is bankruptcy the right answer for local cities that are underwater?
I don't know, but the discussion made it clear that there's nothing to be ashamed of in having these kinds of talks at an ever-more sophisticated level. The mayor himself, years ago, saw the merits in keeping bankruptcy in mind as an option.
There seem to be two camps among this city's leaders and thinkers. The first sees the city as just another ship floating precariously in rough sees. They seem to be working furiously to keep the ship afloat -- whether it is with gum, duct tape or something else, the goal is to survive. And either they believe 1) that if they just keep things going long enough, the seas will calm and the city will prosper again or, 2) that if they just keep things going long enough, they'll be able to hand over the helm to someone else.
The second camp believes that something needs to change and change fast. The city is deteriorating and services will be on the chopping block like nothing we've seen. It's one thing to try to solve a deficit knowing that next year might bring prosperity. It's another thing to know that solving this year's deficit and know that it's only going to be worse next year.
As evidenced by the sophisticated forum last week, those in the second camp are now thinking about bankruptcy very seriously.
Update: I tweaked the formatting on this post and added "True or False?" to make it clear those bolded statements were the ones we were putting to the test in this post. Just to be clear. Some readers were confused.
Having attended the breakfast meeting, it seems to me the cost of Bankruptcy is almost insignificant when compared to the cost of continuing on our wistful dreams that all will be OK. Particularly when you hear our politicians talking about how much money will be saved by building a new multi million dollar City Hall, the wonderful advatages of expanding the Convention Center and building a new downtown library.
Did anyone at the forum cite existing California case law where a municipal corporation was able to "tear up agreements with employees no matter what anyone says about them being vested benefits or not"? I've not seen such an expample, and question whether California courts would ever allow such an outcome. This issue is critical, because if a bankruptcy proceeding does not modify vested pension benefits, it doesn't seem there's much to be gained from it.
Bystander: Yes, the question was addressed at our forum and you'll be able to hear the panel response for yourself by Wednesday when we post our video at link Perhaps Scott might be kind enough to also post on his blog? That said, quick answer to your question is YES if it's part of the labor contract (Mojdehi). Mann cited Vallejo and OC cases as setting precedent and noted that "vesting provisions of California state law are in essence trumped by bankruptcy code assumption and rejection".
This is, to be blunt, the $4+ billion dollar question. Orange County and Vallejo presented VERY different liabilities. In the case of OC it was essentially a run on their investment pool by smaller agencies and the need to reorganize to meet those "investor" cash calls. In the case of Vallejo it was a set of intertwined agreements/arbitrati rullings regarding compensation AND minmum public safety staffing levels that created liabilities that could not be covered. But I have not found case law that is directly on point regarding municipal bankruptcy and pension/OPB costs. It would be new ground and the kind of precedence setting issue that would probably end up before the Supreme Court before any resolution (given the number of governments facing these looming liabilities).
Erik: See my response to "Bystander" above. All three panelists including Judge Ryan clearly stated that the court can reject the contractual obligations of its employees. However, the Judge also emphasized the importance and necessity of good faith negotiations. Judge Ryan: "Requirement for rejection...is good faith. Municipality must enter into good faith negotiations with its employee groups. Cannot just arbitrarily decide to reject those agreements."
IANAL, but I think Erik has this more correct. Rejecting current contracts is one thing, taking away compensation a employee earned under contract 10 years prior is quite another. // This said, pension benefits are a huge part of the City's financial problem but we want to be careful not to confuse them with the whole problem. We had a conversation here recently about the benefit improvements that were part of MP1 & MP2. The Pension Reform Committee (2004) and Navigant Consulting (2006) separately found that benefit improvements accounted for about 40% of the underfunding liability (and I suspect slightly less today). A huge sum, sure, but setting those contracts back to pre-MP1 would still leave us deeply underwater. We have a lot of problems.
At this point I think the fair question is that we have no idea what would happen. We know that Collective bargaining agreements can be set aside. While not a tremendous amount of case law, that is clear. But the obligations to SDCERS (because that would be likely the formal debtor) as a administrator of a sponsored-plan are VERY murky. I have looked for 6+ months and I have yet to find anything that resembles case law/ruling that is on point. The fair answer about vallejo is that we don't get info there because the City excluded CALPERS almost immediately - one could argue as a legal strategy. Retiree health seemed a bit more at risk in the early filings, I have not followed closely enough to comment on current status. So...what BK does is open up a BIG can of uncertainty.
"...hosted by the San Diego County Taxpayers Association." The forum sounded beneficial, but I'm always suspicious of the SDCTA. Have you looked into them? Several years ago KPBS did and it turned out they indeed represent San Diego taxpayers - but not the "ordinary ones" like you and me, but instead, businesses (i.e. lawyers), developers and corporations (which, to be fair, also pay taxes.) No problem with that, but maybe full disclosure is in order when citing this organization and their real benefactors. I don't think they're the "grass roots" association many think they are.
Tom: As a non-profit public benefit 501c4 organization, our filings are public record and can be accessed via the IRS. But I'll save you time: yes, the majority of our revenue comes from businesses - because we charge businesses more to join as members and they support our events through sponsorship. We'd have to charge individual taxpayers much more for membership and event fees to maintain our current operating budget without support from local taxpaying businesses that believe in our mission.
why don't you just have them posted on your web site? Advocates for accountability, of which I think you would characterize SDTA, often clammer for this from public agencies. Since you get a tax benefit from the public as a non-profit, I think you should post it to your web site so we have the same ability to learn who funds SDTA as we do about who is donating to elected officials. A bit lame suggesting your transparent then sending the commenter to the IRS for your records. Come on!
what a super panel. too bad jerry sanders was not there for he would have heard what mike aguirre,pat shea and i have told him and the city council over and over for the past five years...'' IT IS TIME TO SEEK RELIEF UNDER CHAPTER 9 OF THE BANKRUPTCY CODE.the city of san diego will never get out from under its present debt problems and it will only get worse...especially for the taxpayer who will get less and less service from the city. the chief of police has said over and over that he cannot cut anymore and one only need to look at our streets to realize the city of san diego cannot pay its debts as they come due. all you ever hear is " not on my watch". i believe that is what the captain of the titanic said?........don mcgrath,former assistant cityattorney.
If Mayor Sanders had listened/acted upon this advice, we would already be past the worst parts of this financial meltdown----and it is a meltdown. Sanders made too many unsustainable claims while running for office. Had we declared BK earlier, we might have a credible financing plan for all of the capital projects that he (Sanders) is promoting; and, currently, we would be in a stronger yearly general fund circumstance (more finite clarity of obligations and revenues). Anyway, nice to read some comments from you, Mr. McGrath. I have always enjoyed your frank commentaries. Keep up the dialogue. More and more San Diegans are interested in learning more details about civic reorganization-bankr (it really isn't an outrageous concept).
Three good points; 1) attorneys in favor of bankruptcy are self serving, and therefore lack credibility; 2) Remember the last time a judge was in charge of the City of San Diego .... right ... Dick Murphy was a fine judge, but a poor Mayor. He lacked what Jerry Sanders has, an experienced and thorough understanding of the City's situation. In concert with the unions and staff of the City, he will be able to solve the City's problems much better than any greedy attorney/Mayor 'wannabee'. And finally 3) services will be cut if voters don't want to pay for them.
Taxpayers ARE paying for services and have been for many years. Now the government wants to coverup its screwups and poor negotiating skills with increased fees and taxes as usual. There always seems to be someone like yourself that comes around and blames taxpayers for not wanting to pay for services as though they've been free all this time.
Taxpayers in San Diego do not pay for trash pick-up, or for parking at many public parks. They apparently do not want to pay for a library or expanded convention center which would ensure more revenue for San Diego, or a decent city hall which is currently a fire/earthquake/asbe ridden trap that I wouldn't let my dog spend time in. Take a look at the city halls and libraries in San Marcos, Chula Vista and Coronado to name a few. New, modern and befitting of those proud, progressive and future looking citizens who not only pay taxes, but also make out of pocket donations for better schools and facilities in their cities. If I lived in America's finest city, I'd probably be as unhappy as you are.
I'd love to restructure the employee benefits that are a major source of our financial woe, but I can't get past the reality that the city's bankruptcy efforts would be guided by the same ineffective leadership that's perpetuating the situation. Two current examples: (1) The Park and Rec Department is planning to spend money turning Mount Hope, the cemetery the city runs at a $300k annual loss, into a showplace for art. When Mayor Sander took office, he made a big show of demanding all the managers write resignation letters, so he could accept those he felt weren't up to the tasks ahead. How did he miss these people? (2) The mayor is cheer leading convention center expansion, a new central library, and a new city hall, claiming they will cost the city nothing, while pleading for the public to send him cost saving ideas.
folks, please do not kill the messengers. this panel is THE BEST on this subject. i do not agree or disagree with any of them. they are simply the best and the brighetist on this a very, i mean very technical area of law. all i say is listen to what they,the lawyers and a judge,maybe THE only judge who has ever been there,say. your politicians are not listening to anyone but there own political carriers....tragic!. mcgrath,former asst. city attorney.
Can someone please point me to a place where any municipality (not corporation) has been able to retroactively reverse vested pension benefits in bankruptcy? My understanding is that Vallejo has not even tried it because they were so certain it was not going to make it through court. Is there any case law/precedent on this?
Sometimes I am just TOO slow. Old age. But I finally figured out the question I WISH had been posed to the panelists since it would more starkly frame what BK does and doesn't mean...("Supposed you are retained by those creditors who oppose the San Diego' seeking BK relief. Would the following be good pieces of evdience that the city isn't making a good faith effort to resolve its obligations outside of BK court? That it continues to spend $8+ million to support Arts organizations and street fairs? That it continues to embrace a pension repayment schedule more aggressive than most other public plans (20 years v. 30)? Tthat it forgoes charging enterprise funds "right of way" fees even though most other CA jurisdictions do and it has been deemed legal." Would love to hear the answer.
Yep. This is the gist of one of the more illuminating questions. (Though I don't think $8M in arts spending is gonna look to anyone like evidence of the means to address $2B in liabilities. OTOH, the right-of-way fees I'd be interested to learn more about.) Can you flesh this out some more?
For a number of decades San Diego, like many California cities, "charged" the enterprise funds (water and sewer) a "fee" for the use of the public right of way and deposited the money in the general fund. The "logic" was that the General fund paid for the right of way and thus it was reasonible for the general fund to impose "rent" on the enterpirse funds. The UT railed against it. So too did taxpayer advocates. It is a tortored logic. But it was to the tune of between 10 and 20 million if memory serves. It ended about a decade ago under Murphy.
This is the kind of critically important discussion that sets Voice apart from other new sources in San Diego. All the BS aside, you have zeroed in on the questions..and answers that matter in understanding municipal BK. I was at the breakfast and your summary is right on! Keep it up!!!! At ease.
Users may post more than one comment, but should not pose as multiple users. Multiple posts from the same IP address but with a different user name on each will be reviewed to determine whether abuse has occurred.
Posts with overly personal attacks or unsubstantiated allegations may be edited or deleted.
Please be patient with the posts -- there may be a delay before they appear on the site -- and make sure to enter the code in the "image verification" box.
Post a comment
Scott Lewis on Politics
The Scott Lewis on Politics blog, abbreviated cleverly as SLOP, is a collection of observations, insights and the occasional scoop on public affairs in San Diego. Please feel free to e-mail Scott at scott.lewis@voiceofsandiego.org.
Listen to voiceofsandiego.org's radio program on AM 600 KOGO: Latest Episode (November 8): Scott Lewis and Michael Zucchet talk about the city's budget
PRINT 
E-MAIL STORY
SHARE
FACEBOOK
REDDIT
NEWSVINE
DIGG
DEL.ICIO.US
BLINKLIST
Don't want to miss a story? Want to be the first to know about breaking news? Sign up now.