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Monday, February 27, 2006 | It seems like everyone is getting ready for the city of San Diego to enter into a Chapter 9 bankruptcy. That is, everyone except city officials.
The city’s retirement system has ordered its staff to prepare for the possibility. The port and airport – two entities that are lucky enough to participate in the city’s beleaguered pension system – have both indicated they are considering ways to sever ties with the city out of a concern of the potential for bankruptcy.
Potential investors hoping to take the city’s share of tobacco-settlement revenue won’t even consider making that move unless the city creates a whole new level of bureaucracy just to protect them in case city leaders decide to do the bankruptcy thing.
Bankruptcy is not something that happens to a company or a city like San Diego.
It’s something the city or company does. And more and more people looking at the city’s situation are doing the math in their heads and noticing that a rational person leading San Diego city government right now might consider doing the bankruptcy dance.
And dancing to the B-tune is exactly what Executive Assistant City Attorney Don McGrath said the city should start doing.
McGrath is one of City Attorney Mike Aguirre’s top lieutenants. He’s the guy in the room for most of the big conversations. He’s leading the team of attorneys that is challenging the legality of retirement benefits expected by thousands of city employees. He’s also leading the defense and appeals of the notorious $100 million lawsuit the city lost to developer Roque de la Fuente many years ago.
He was in the news Saturday. He had gotten into an argument with Aguirre and he didn’t show up to work on Friday. Rumor had it that he had been fired Thursday night and then rehired Friday, a local paper ran with the story. He told me that there was no story. He was going to work on Monday. He said Aguirre and he had argued angrily. They had “said some things.” But it was natural, given the stress of the times.
“We’re making massive decisions and there are going to be angry arguments about them,” McGrath said.
McGrath said he wouldn’t comment on what his argument with Aguirre Thursday was about.
But within seconds he was talking about bankruptcy.
“I know it’s not popular. Bankruptcy is not a good word to many people. But I don’t see how we can make it out of this without some sort of reorganization,” McGrath said.
It starts here: In coming weeks, the city’s pension system will hand over a bill. It will ask for what’s called an “annually required contribution” from the city.
Some have speculated that required contribution could be as high as $300 million. For the purpose of comparison, in 2003 the city only paid $85 million.
Making a payment like that would cripple the city. That’s, of course, pretending that city government isn’t already crippled. Right now, for example, in today’s budget, we don’t have enough money to bring the fire department into any kind of minimal state of readiness. Fire officials say, without much hesitation, that they simply aren’t ready for a major fire or disaster to hit San Diego.
Take $300 million away – what amounts to roughly one-third of the city’s entire General Fund – and you’re left with a government further unable to provide the infrastructure, services and daily emergency help for which residents pay taxes in the first place.
There are two approaches to this problem. McGrath, for one, and his team of attorneys are working to prove that the pension-benefits enhancements of employees received in 1996 and 2002 were illegally obtained and should be voided. That would cut the benefits employees receive when they retire and therefore cut the debt the city owes the pension system now.
If that legal effort fails, McGrath said, bankruptcy’s the only option. Under a Chapter 9 bankruptcy proceeding, the city could set up an entirely new financial plan, he said. It would be an organized structure under which all of the problems the city faces can be handled and where everyone gets a “haircut,” he said.
A guy ran for mayor and lost preaching that same philosophy.
The employees, both furious at the legal effort against their pensions, fearful of bankruptcy and mindful of the pension’s stress on the city budget, say there are better solutions for the city. The city, they say, should raise taxes, sell land and do everything else possible to raise enough money to pay this huge pension bill. In fact, as they’ll repeatedly point out, the city has the option of raising a “pension tax” potentially without a vote of residents.
So where do the city’s leaders stand? Good question. They don’t like the options. They know residents hate taxes – taxpayers don’t want give up more money to the same people who got them in this mess. And for some reason they think the City Council is still dominated by the people who got them in this mess.
I don’t know why they would think that.
On the other hand, city leaders know that the credit rating agencies that hold the map to Wall Street lenders don’t want them to talk about bankruptcy at all.
Credit-rating agencies don’t want the city to go into bankruptcy because they know they would look pretty bad. After all, they’re job is to give Wall Street a good picture of how safe an organization is for investment. If they say it’s safe, they have an interest in that being true. And although the credit-rating firms have warned investors in the last year or two about hazards in San Diego, when it really mattered they were giving San Diego the best grades in the class.
So they won’t be happy that McGrath – as much a city official as anyone – is blabbing about bankruptcy. And unlike even Aguirre, McGrath’s talking about it and he’s more than willing to keep it up.
“Why not? We’re spending too much right now on legal and expert fees to save ourselves from bankruptcy. The City Council should have an open forum to decide what benefit they can get from this process. Why won’t they bring a lawyer down to at least talk about it?” McGrath wondered.
“At least talk about it,” McGrath said. He told me that as a representative of the City Attorney’s Office, he’s being asked for official advice about how the city should get out of this. He says he tells them that if bankruptcy is a possibility, they should prepare for it now.
In other words, they should do what every interested party outside the city is doing as it watches events unfold.
“I’m just tired of being shut down in these meetings by people who tell me right away they simply don’t want to hear the word bankruptcy. They don’t like the sound of the word. Well, it’s a tough job. You’ve got to do it,” McGrath said.
We’ll see if he gets fired…again.
Scott Lewis oversees Voice’s commentary section. Please contact him directly at