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Monday, June 06, 2005 | Just the other day after the city learned that it had suffered yet another downgrade to its credit rating, some officials reacted with comments about bankruptcy. Specifically, of course, how the city was nowhere near entering it.
It wasn’t the first time that city leaders answered a bad credit report with talk about how the city was not even close to insolvency.
In one of the most memorable moments of last year’s mayoral campaign, in fact, the incumbent, Mayor Dick Murphy, reacted to news of an especially untimely credit downgrade by Moody’s Investors Service with a press conference the same day.
Set up next to him at the event was a very large white sign with the word “BANKRUPTCY” printed prominently. A circle surrounded the word and a sharp red line was drawn diagonally though it.
It was hard to miss the message. The mayor was declaring “No Bankruptcy.” It was a classic sign, so classic, in fact, a few members of the press corps in attendance joked about creative ways to steal it. The mayor blamed his opponent, County Supervisor Ron Roberts, for scaring the rating agencies with his talk about bankruptcy.
So it was when the latest Fitch Ratings downgrade came out just more than a week ago – a few city officials again declared “no bankruptcy.” Among the reasons for the rating downgrade, according to City Manager Lamont Ewell were the “several members of our community who, without informational access to the city’s cash flow, are citing the potential for bankruptcy.”
One of the members of the community is, obviously, attorney Pat Shea, who is running against 10 others to replace the mayor in July’s special election. Shea has talked plenty about the advantages of “structured reorganization.” The legal move, he said, would force employee unions to make yet further benefit and even salary concessions so the city could refigure its massive pension deficit. Shea’s candidacy is probably what labor attorney Ann Smith – who represents city workers – was thinking of, and getting annoyed by, when she started talking about bankruptcy to the City Council Tuesday.
“Don’t tell the public that you’re thinking about going into bankruptcy court because I’m going to tell the bankruptcy judge ‘Your Honor, they have the power, duty and ability to impose a pension tax levy and they’ve got real estate that’s a list a mile long. They are not broke, they can afford the benefits they promised people,” she said.
According to a report given to the Pension Reform Commission in March 2004, the city had roughly $960 million dollars of real estate holdings then that “could be transferred as assets to the San Diego City Employees’ Retirement System.”
Add a little bit of value appreciation that may have occurred over the last year and, yes, the city does have a lot of real estate assets.
Shea isn’t buying it. When he formally announced his candidacy for mayor, he stood in front of beautiful Torrey Pines Golf Course and told reporters that the grassy tract was the kind of invaluable property the unions and others would have the city sell in order to pay increased pension benefits.
“You cannot cut enough services, you cannot raise enough taxes and you cannot sell enough city parks to buy your way out of this monster, and best of all you don’t need to,” Shea said, as quoted in the Voice story.
Credit rating reports haven’t always provoked this kind of debate. Take, for instance, more than three years ago when, on May 30, 2002, the city put out a press release touting its credit rating. Fitch Ratings service had just bumped the city up to its highest rating of “AAA.” The press release led with a claim that “No other large city in California has an ‘AAA’ general obligation bond rating from Fitch.” And the press release that day included a quote from City Treasurer Mary Vattimo – who is now facing felony charges for her vote several weeks later to approve the now notorious Manager’s Proposal II.
“The city of San Diego has been rated highly by the rating agencies for many years. These new ratings underscore the city’s sound and conservative financial management and strong, local economic fundamentals,” Vattimo said.
Indeed, Fitch’s review of the city’s financial position then was glowing. Either the analysts weren’t aware of, or didn’t care about the declining health of the pension system that was causing insiders like Vattimo to fret about a massive balloon payment that may be due to put the retirement fund on more solid footing. Vattimo and others approved a solution to that problem: Manager’s Proposal II, which continued the underfunding of the pension plan at the same time employees like her got benefit enhancements that added more debt.
It was an arrangement that ultimately led a different credit rating agency to completely suspend its evaluation of the city – pulling one of the most important legs out from under the stool that many city leaders had been standing on for years to proclaim the city’s fiscal fitness. But that’s not the credit report the City Council was talking about Tuesday. Fitch may not have quite understood the situation three years ago, but Councilman Scott Peters said the agency’s most recent report was right on the money this time around: “This is a really revealing downgrade. Among all of our downgrades this is one you actually should read,” Peters told the packed City Council meeting and he continued: “What this says is … that this is not a city that needs to declare bankruptcy. This is not a city that faces economic challenges as much as it is a city that faces leadership challenges.”
And then he declared “No Bankruptcy.”
Scott Lewis, a former reporter at The San Diego Daily Transcript, is spending a short time in South Carolina. You can e-mail him at