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Thursday, March 09, 2006 | A halt to the city’s cash flow would give City Hall grounds to file municipal bankruptcy, an attorney advised several trustees who oversee San Diego’s pension system Wednesday.
A representative of the Mayor’s Office ruled out bankruptcy at that same meeting, yet hours earlier, another city official – City Attorney Mike Aguirre – stood in a courtroom and told a judge that San Diego may not be able to pay this year’s pension bill.
Whereas corporations and individuals go bankrupt once their property is outweighed by the amount they owe, the retirement system’s fiduciary attorney Harvey Leiderman told trustees and the public that municipalities such as the city of San Diego would only file for bankruptcy if it could prove it wasn’t able to pay its bills.
“For municipalities it’s a cash-flow test of ‘are you able to satisfy your obligations as they come due?’” Leiderman said.
At the very least, the amount the city will owe to the retirement system will significantly mold the municipal government’s already-scarce, day-to-day budget for the coming year, but Aguirre said that the city will have severe cash-flow problems if a court does not void benefits that Aguirre argues are illegal.
Officials have estimated that as much as one-third of the budget will be spent on retirement costs in the next fiscal year, but the city is holding its collective breath until the official invoice is released next Friday, March 17.
“We have a July 1 payment to make and we’re not in the position to make that payment,” Aguirre told Superior Court Judge Jeffrey Barton, referring to the city’s deadline to pay its annual pension bill.
Severe as the problems may be, the city will not file Chapter 9 Municipal Bankruptcy, said Jay Goldstone, the city’s chief financial officer. He echoes a growing number at City Hall – the mayor, City Council and, to an extent, Aguirre – who suggest that bankruptcy isn’t a solution.
“Bankruptcy will not be on the agenda as we go forward,” Goldstone said hours after Aguirre, when he addressed the retirement board’s ad hoc committee that studies and suggests reforms for the embattled retirement system.
The situation puts the city in a tug-of-war with itself, as officials claim the pension benefits that were granted in 1996 and 2002 are causing it a tremendous financial headache that can only be resolved by declaring them void, but at the same time declaring that it will under no circumstances declare the situation to be irresolvable.
Aguirre said Wednesday he plans to ask Barton next week to rule on the legality of the benefits that were granted those years, hoping that the judge will decide that the enhancements were created illegally and should be void. The city attorney alleges that members of the retirement board and of the city had conflicts of interest in striking a funding arrangement that enhanced pensions at the same time the city was allowed relief from its pension bills in 1996 and 2002.
Circling the wagons are the city’s public employee unions, who believe the pension benefit enhancements that Aguirre is challenging are constitutionally protected. The unions recently intervened in Aguirre’s lawsuit and balked this week at a proposal Mayor Jerry Sanders and Aguirre made a few days ago to settle the pension dispute through out-of-court mediation with a retired federal judge. Barton asked the city, its retirement system and the unions to enter mediation, but said he cannot order them to do so unless given the go-ahead by all of the parties involved or another Superior Court judge.
Ann Smith, the attorney for the Municipal Employees Association, said it was an inappropriate time to begin mediating because the parties involved were disputing the facts of the case and had different ideas about whether the questionable benefits could even be rolled back.
“I think it’s premature,” she said. “I’m not amenable at this point because I don’t think the issue is framed well enough.”
Aguirre said it’s time to move the case forward, as the city’s financial well-being depends on receiving a judgment soon so it can prepare its budget accordingly. The mayor is expected to unveil his proposed spending plan for the next fiscal year in mid-April, which will be finalized by the end of June. The sooner the city knows about whether its pension payment due July 1 will include money for the benefits he claims to be illegal, the better off the city will be, Aguirre said.
Smith said that if the city was in such an emergency to hurry up the process, it wouldn’t have tried to block the unions from intervening in the case. Barton ruled that the MEA and unions representing the city’s blue-collar workers and firefighters could intervene in February.
Barton said Wednesday that either everyone will agree to mediation by March 24, or he will ask Judge Ronald Styn to decide whether it’s appropriate for this case.
If not, Aguirre’s challenge to the enhancement goes forward. If Aguirre receives an unfavorable ruling from the judge, he said he will request that the case go forward with a full jury trial. If it gets to that stage, the trial would begin Oct. 6, Barton said.
Still, a jury trial would come after the July 1 payment date, which worries Aguirre.
If the city were to not pay its pension bill, the San Diego City Employees’ Retirement System could acquire the collateral promised in a 2004 legal settlement. The collateral consists of various high-valued city owned properties, such as a swath of the Qualcomm Stadium parking lot.
Still, the attorney who represented the city retirees in that 2004 settlement said he believed the city would make its payment without using the real estate that was put up as collateral. Aguirre was emphasizing the city’s problems in an effort to convince the judge that voiding the benefits could save the city, attorney Michael Conger said.
“I just think it’s more advocacy by the city attorney,” said Conger, who represented the retirees in a lawsuit that used the same conflict-of-interest legal argument as the city attorney. “It’s a very important issue that he wants to get solved early.”
Leiderman also agreed that it was unlikely that the city would go bankrupt when he presented an overview of municipal bankruptcy to several SDCERS trustees and the public Wednesday.
The city would have to prove it was insolvent even if it claimed it didn’t have the cash to pay its bills, Leiderman said.
“This issue would be hotly contested,” he said.
Aguirre reiterated in an interview later that day that the city would be hard pressed to pay up if the benefits he maintains are illegal are not set aside. However, he didn’t say whether it would drive the city into bankruptcy.
“That would take us into unchartered waters,” he said. “It is a cash flow problem with 10 years of momentum behind it, so it’s a slow-moving glacier of debt that is taking out everything in its path.”
Please contact Evan McLaughlin directly at