Is Bankruptcy the Only Option?

Friday, July 08, 2005 | Editor’s Note: Both Francis and Shea were contacted for their thoughts on bankruptcy. Voice sent all of Pat Shea’s questions and comments to the Francis campaign and asked for a response. In return, the Francis campaign supplied the two paragraphs that appear at the top of the column. All statements below were not edited; the information appearing on the site was provided by each candidate.

From the beginning of the campaign, Pat Shea has said that bankruptcy is the best option for starting to solve the city of San Diego’s financial problems. Two of the other major candidates – Donna Frye and Jerry Sanders – have said that bankruptcy is an option they would consider. In contrast, Steve Francis has consistently said that he does not think bankruptcy is necessary. Below are comments from Francis and then a rebuttal from Shea.

Steve Francis

I am the only major candidate for mayor who has agreed not to declare bankruptcy. Bankruptcy is the easy way out for politicians, but not for the people of San Diego. Bankruptcy will place the future of San Diego in the hands of a judge whose interests are not aligned with the people of San Diego. It will force us to sell off precious assets and landmarks, while placing a mark on the city that will last for years to come.

Pat Shea

Below are the five concerns stated by fellow mayoral candidate Steve Francis as to “Why Bankruptcy Is Not An Option” and my responses.

Francis: “The price tag alone, estimated to be between $30 million to $50 million, is cost-prohibitive.”

Shea: This is remedial math. The City is currently accruing (but not paying) 8-percent interest on the multi-billion dollar pension deficit. Using even the lowest pension deficit estimate of $1.37 billion, that equates to about $110 million per year. At the more reasonable $3.2 billion number the interest alone is $240 million or $20 million per month. The idea that it is “cost prohibitive” to spend $30 million to save hundreds of millions of dollars is just absurd.

Francis: “Bankruptcy puts the future of San Diego in the hands of a judge whose primary motivation is not the interests of the people of San Diego.”

Shea: This statement is completely incorrect and reflects a lack of understanding as to the legal process related to Chapter 9. The City alone submits the Chapter 9 Plan of Adjustment. This requires all parties such as citizens, taxpayers, city employees, retired city employees and others to sit down and negotiate global settlements. And if you don’t sit down at the table and negotiate, your claims are essentially gone. That’s a big motivator for negotiation.

The only “motivation” of the federal judge is to ensure compliance with the law.

Francis: “Bankruptcy is a ‘lose/lose’ option for all parties involved. The people of San Diego will see their services further disrupted, and labor unions will see their benefits slashed by a judge, rather than negotiated by an elected official … albeit an elected official they have not influenced with campaign donations and twisted arms.”

Shea: This statement is just silly. The Government Finance Officers Association, the National League of Cities and the National Association of Bond Layers wrote, “Chapter 9 works” and “any municipality can successfully navigate the provisions of Chapter 9, and the provisions of Chapter 9 function well under the most stressful circumstances.”

Mr. Francis’ concern that “the people of San Diego will see their services further disrupted” is just wrong. The services of the city will continue to be provided as they are now – only better because the city will be financially improved. Chapter 9 only addresses the adjustment of the debt. Chapter 9 has nothing to do with the operation of the city on a day-to-day basis. It is worth noting that as a result of this enormous debt, our services have already been disrupted and slashed to the bone – our libraries are closing, our community centers are closing, our potholes are not being filled, our sewer and water lines are not being replaced, we do not have adequate police and fire protection, and our parks and beaches are not being cleaned. In addition, our fees are increasing and our public lands are secretly being sold. Only through the Chapter 9 process will we be able to successfully adjust all of this debt and emerge with an improved ability for our city government to provide the basic services for which government was created – to protect the health, welfare and safety of the public. That would include police, fire, water, sewer, roads and public spaces.

The statement that “labor unions will see their benefits slashed by a judge, rather than negotiated by an elected official” is simply not correct. The judge will not slash labor benefits. Those benefits, along with other creditor claims, will be negotiated by all parties.

Francis: “In addition, it has the potential, as occurred when Orange County filed bankruptcy, to increase the borrowing costs of other entities – such as the San Diego School District, the Port of San Diego or the County Water Authority, further punishing San Diego taxpayers.”

Shea: Mr. Francis must be confused. We have no ability to borrow right now. We have no certified, audited financial statements for fiscal year 2003, 2004 or 2005. We currently have no credit rating at all with Standard & Poors and some of our existing bond ratings have been lowered to one level above “junk” status by Fitch. Our fees and taxes are increasing. Chapter 9 will allow us to get audited financial statements with all of our obligations quantified. It will allow us to adjust our debt so that we can afford to pay it. This will improve our credit rating, lower our borrowing costs and let us move forward as a city. That will be to the benefit of not only all of us, but also “other entities.”

Francis: “The impact of declaring bankruptcy will stay with us for a very long time. The repercussions of bankruptcy shell-shocked Orange County for years after the county declared bankruptcy in late 1994. Mark Baldassare, Senior Fellow at the Public Policy Institute of California and a leading expert on the Orange County bankruptcy, paints a dismal picture of Orange County in this piece written three years after the bankruptcy.”

Shea: History is worth reading. Orange County filed for Chapter 9 bankruptcy in December 1994. By May 30, 1996 Moody’s upgraded the county’s rating from “junk status” to “investment grade” status for the County’s recovery bonds.

By December 1996, the University of California, Irvine’s 1996 Orange County Annual Survey, conducted by UCI professor Mark Baldassare, found that:

“The fear brought about by the bankruptcy two years ago has receded. This, combined with a striking increase in positive feelings about the local economy, has resulted in a return of optimism in Orange County. More than eight in 10 residents say things are going well in terms of quality of life in Orange County. Most residents feel the money we’re spending on transportation projects in the county is being put to good use. Three in four say they are happy with the way Measure M funds are being spent.”

Ten years later, in December 2004, Mr. Baldassare again confirmed the positive results of Orange County’s Chapter 9:

“Today, eight in 10 county residents say they remember little or nothing about the dark days of the 1994 county government bankruptcy. The results of our 2004 Orange County survey indicate that the county has recovered soundly positive ratings of the county’s overall quality of life. And the county’s economy is up sharply. Other signs of the county’s solid economic recovery include the relative optimism evident in the local consumer confidence index today, and the fact that perceptions of the housing market have improved markedly from a decade ago. Orange County was the recipient of awards for its efforts to reinvent county government in the wake of the bankruptcy. The restoration of a good credit rating was also achieved.”

It is worth noting that Mr. Baldassare recently raised concerns about the negative impact on the county’s long-term debt that results from “big pension increases” over the past three years for employee groups.

Steve Francis and Pat Shea are both running for mayor of San Diego.