Friday, October 28, 2005 | Whoever wins the upcoming City Council races will have to mull the city’s financial troubles over with their new colleagues. The council may have to decide whether it will approve putting a tax increase before the city’s voters or to file Chapter 9 bankruptcy to solve the city’s fiscal challenges.

The last resort for both candidates vying to be San Diego’s first strong mayor is bankruptcy.

Former police Chief Jerry Sanders said he will use the threat of bankruptcy to bring the city’s labor unions back to the bargaining table to renegotiate contracts that result in a smaller long-term pension liability. Currently, the funding shortfall for the San Diego City Employees’ Retirement System is at least $1.37 billion.

Councilwoman Donna Frye, Sanders’ opponent, said she will ask voters to approve a ballot initiative that, if passed, will provide her with the authority to unilaterally declare bankruptcy if she is not satisfied with workers’ retirement concessions.

For Sanders to declare bankruptcy, he would need the council’s approval. Frye said she would ask the council to put her initiative on the ballot but would, outside her mayoral capacity, arrange for a petition drive to gather signatures needed to put the question on the ballot.

Current council members have been cool to the concept of filing for Chapter 9, but the idea has been argued by some as an attractive way to deal with the city’s myriad financial woes without selling city assets or raising taxes.

The downside, bankruptcy’s opponents say, is that the city’s credibility on Wall Street is ruined and that legal costs associated with filing are out of control. The city would likely also incur tens of millions of dollars in attorney fees and tens of millions annually to pay for financial problems now if it files for Chapter 9.

Chapter 9’s backers will say that bankruptcy court is the only forum to solve all of the city’s financial troubles in one place by arranging that contracts are restructured to keep the city solvent.

The city’s annual payments have climbed since a civil lawsuit settlement last year forced the municipal government to make actuarially sound annual payments into the pension fund. For fiscal year 2006, the city paid $163 million – a $33 million increase from the year before. The added strain on this year’s budget forced cuts to libraries, park maintenance, after-school programs and police community service officers.

The pension fund is just one part of the city’s larger financial problem, some observers say. The city’s infrastructure, such as roads and sewers, is underfunded by about $1.2 billion. Reports show that the city needs $500 million to maintain its basic non-infrastructure needs, most of which are recurring expenses, $133 to upgrade public safety communications systems, more than $1 billion if the Point Loma Wastewater Facility was required to comply with federal standards (it currently has a waiver), and has several pending lawsuits and settlements that could force hundreds of millions of dollars in payments for police overtime, wastewater rate refunds, damages to Roque de la Fuente’s Border Business Park and sewer line construction.

A tax hike – such as the hotel fee increases that voters rejected twice in 2004 – is seen as a remedy by some, but not necessarily a popular option.

Studies show that the city’s taxes are among the lowest relative to other large California cities. Bringing the city’s rates for garbage collection, real estate transfers, business licenses, hotel rooms and utility usage to the average levels among the state’s top 10 cities could generate an extra $279 million, a think tank study released this spring said.

As part of Frye’s financial plan, she wants to ask San Diegans whether to increase the sales tax by a half-cent over a 10-year span. Like her bankruptcy initiative, she could also privately organize a petition drive to put the sales-tax initiative before voters if the council doesn’t approve it first. Observers say that, for the time being, it is unlikely that voters will approve any tax increase because of the public’s overwhelming distrust for City Hall.

Read candidates’ responses and ideas here

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