Friday, February 18, 2005 | This is the second in a two-part series. Voice of San Diego will continue to detail suggested solutions for the city of San Diego’s financial problems.

First came the denial and then came excuses.

Now, the city of San Diego’s hopes ride on acceptance. With acceptance, city of San Diego leadership can begin addressing the solutions necessary to save San Diego.

Sure, something about the past really stunk. Everyday more is learned about the funk that led to this critical point. But in order to deliver that first whiff of fiscal freshness that could be the new, olfactory-pleasing City Hall, a plan for the future is necessary.

Some already believe that bankruptcy is the best option. In fact, this once-radical crowd seems to grow everyday. Others believe change can come from within, though confidence in City Hall leadership remains desperately low.

“I think that bankruptcy is not necessary, but if action isn’t taken promptly, it may be the only alternative,” said April Boling, accountant and former chairwoman of the Pension Reform Committee.

After talking with a cross section of leaders and observers, the Voice of San Diego offers the following outline of what lies ahead in order to put together the skeleton of future San Diego’s healthy municipal body – from finishing the audit, tackling the pension deficit, examining bankruptcy as an option and restructuring the budget.

1. Finishing the audit

If it wasn’t so important, it would be too obvious to mention. Everyone agrees that finishing the certified audit is the first and most critical step in extracting the city from its financial freeze.

Endless delays mean that no one who speaks publicly about the issue knows when, in reality, this audit will be completed. Without it, the city remains essentially barred from Wall Street. It cannot borrow to continue or begin critical infrastructure projects, libraries and fire stations and the $1.37 billion pension deficit.

Officials believe the hiring of the Securities and Exchange Commission’s former chief accountant is the final step, though their past cooperation with KPMG has been spotty. Accountant KPMG has also requested that the San Diego City Employees Retirement System board turn in all its documents, something it has so far refused to do. Mayor Dick Murphy will nominate and the City Council approve seven of the 13 members of the new retirement board, which are to be in place by April 1.

Murphy could nominate a board amenable to turning over the documents of the past board. This board could also be nominated soon in order to get them prepared for the big transition and to send a message to Wall Street that actions are being taken. Staff is reportedly close to putting together his seven appointees, although a recommendation that whistleblower Diann Shipione not be included amongst these seven is causing a stir among some of the city’s biggest names.

What the audit will actually say about the city’s true fiscal health is also a topic of intrigue.

2. Dealing with the pension deficit

Once the audit is completed, the City Council can at least apply the tourniquet to its most painful wound and release the first $200 million in pension obligation bonds recommended by the Pension Reform Commission last September. The bonds would stabilize a deficit that bleeds 8 percent interest annually, buying the city time as structural reforms are sought.

The next step may be the most critical: labor negotiations. Murphy on Wednesday evening offered up a long list of wage freezes and benefit alterations that he says could knock off half of the pension deficit in two years and lend considerable aid to the city’s annual budget and its future retiree health care liabilities. Labor leaders really didn’t like it at all.

Increased benefits have been found to be the largest factor in the city’s pension deficit, and labor leaders have indicated a willingness to discuss changes, although some have suggested that the city at the same time take a look at subsidies that go toward such groups as the San Diego Regional Economic Development Corp., and specifically, the salaries of these groups’ chief officers. The thought is that business should bear the burden as well.

In past years, city negotiators have had to give up concessions to win such things as payment relief to the pension plan. This certainly decimated any position of power they could have negotiated from, and gave up more benefits than the city could afford. Now, with the city on the brink, all heads are turned to see what comes out of these closed-door talks. Labor leaders believe the city’s problems are getting unfairly connected to the average worker, and want to discuss wage freezes and benefit reductions as part of an overall package that looks at the city’s entire budget structure as a whole.

Boling said the roadmap drawn by the Pension Reform Committee will solve the pension plan’s problems – if listened to. However, she believes a number of the 17 recommendations that remain unfinished could be dealt with tomorrow if the city leadership wanted to, such as examining labor contracts to determine if the city is giving more benefits than it is contractually obligated to and tweaking other nuances of the highly-complicated plan.

“They have not been as aggressive as I would have hoped,” Boling said.

This idea scares the “whathaveyou” out of some. Indeed, the word alone is kind of spooky to say the first time. But a raft of reasonable people now view it as the cleanest way to sever ties to the old ways and start anew. It removes politics and public relations from the rebuilding process, elements that can certainly paralyze important decision making. The true state of the city’s finances would be fully vetted. Outside bankruptcy experts and a federal judge would be left to pay existing debtors and put the city on a financial plan it can afford, matching expenses to revenues. City officials would maintain control of day-to-day decisions.

However, many see it as a black eye to San Diego’s reputation and believe that a reasonable solution can be found outside of Chapter 9 – if a three-to-five year plan is put together to fundamentally address the current situation.

Orange County, which declared bankruptcy in 1994, serves as a close and helpful example. The county survived what some thought would be death and emerged with a stronger-than-ever credit rating. However, parks, roads and social services have all been hit at the expense of large annual payments required to pay down more than $1 billion borrowed to pay debtors. Deferred maintenance leaves the county paying more in the future for maintenance problems that could have been prevented. While significant, these are all issues already faced by the city because of its budget shortfalls.

Even opponents of bankruptcy acknowledge that it may be the only option if swift action isn’t taken.

4. Restructuring the budget

The overall consensus is that the city budget is broken. In fact, many identify it as the root problem that caused the pension issues in the first place. The city has continued to add large projects to a budget that can’t handle them, and in turn, looked for creative ways to capture other revenue streams that were healthy at the time – i.e. the pension plan.

“We need to figure out how to make sure this never happens again,” said Donald Cohen, head of the labor think tank, Center on Policy Initiatives.

Ideas to raise revenues and decrease expenditures abound right now. In the short term, cuts are certain this year because of an estimated budget gap of $80 million to $150 million.

Mitch Mitchell of the San Diego Regional Chamber of Commerce said the business community is open to increased fees and taxes if temporary. Possible increases to the real estate transfer tax, the hotel room tax and fees for water and sewer are on the table.

Additionally, San Diego is the only big city in California that doesn’t charge a fee for trash collection and one of very few that doesn’t charge a utility users tax. Both have been discussed as ways to raise additional revenues. Others believe tourism and tourism promotion could bring in more revenues during traditionally slow tourism times.

Many believe the budget, sometimes described as a “shell game,” must be scoured to fully understand the city’s expenses and revenues.

And at a time when public faith in City Hall is in short supply, getting anyone to give more money will be a tough sell.

“The city’s got to get its house in order before it can ask for any new revenues,” said City Councilman Jim Madaffer.

So get its house in order the city must or someone else will be doing it for them.

Both factions of City Hall leadership – City Attorney Mike Aguirre and the combination of Murphy and City Manager Lamont Ewell – came together twice this week to offer solutions, suggesting that cooperation could be on its way. What comes of these actions in the coming months will likely shape the future of San Diego’s government.

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