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Thursday, June 29, 2006 | With the maturation of local governments across the country in 1800s came growing pains and, soon there after, reforms.
The civil service was installed to eliminate the graft and cronyism that ran rampant and ensured competency within the ranks of a public agency. The doors to legislative meetings were swung open so that the public could monitor how its elected leaders performed and their tax dollars were spent.
Another provision combating Tammany-style politics began gaining steam around the same time – the debt limit.
The state constitution forbids cities, counties and other public entities to spend more money than they make in one year – unless two-thirds of the voters in that locality approve that overflowing cost. The populist provision, touted as a protection for taxpayers, has been used sporadically to challenge big public works projects such as railroads, harbor dredges and sewer systems.
“Municipalities and state governments did deals that got them deeply into debt,” said Steven Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College. “There were all sorts of hanky-panky going on, so the idea was to clean it up.”
Since the late 19th century, cities such as San Francisco, Long Beach and Santa Cruz have been sued for incurring more debt than they can handle in a year without a vote of the people. However, lawyers and public finance experts say governments are rarely challenged on the law because loopholes are abundant.
In San Diego, the obscure state law – as well as a section of the City Charter that mirrors it – has been dusted off by City Attorney Mike Aguirre and is the quieter of the two arguments the city attorney is employing in his attempt to void a decade’s worth of employee pension benefits.
Aguirre’s primary argument has grabbed nearly all the attention in the pension saga – that members of the pension board improperly allowed the city to skirt its pension bill in exchange for increased pension benefits. The district attorney and U.S. attorney have brought criminal corruption charges based on similar theories.
The quid pro quo accusations are hardly new to observers of the city’s pension woes, and they are sexier than the debt-limit argument that plays the role of little brother in Aguirre’s landmark lawsuit. However, if it’s successful, Aguirre’s debt-limit argument may leave a more profound impression on the many other California cities and counties that are grappling with holes in their retirement systems.
While the conflict-of-interest allegations appear to be exclusive to San Diego, the bulk of public employee retirement plans have funding shortfalls. In a 2004 survey of public pension systems, more than 87 percent were considered underfunded to some degree.
The San Diego City Employees’ Retirement System faces a deficit of at least $1.4 billion, brought about in part by deals in 1996 and 2002 that boosted employee benefits while at the same time allowing the city to annually shortchange the retirement fund. Aguirre last year sued the retirement system, hoping to halve the deficit by voiding the deals.
Attorneys in the case said there is no record of a pension deficit being challenged with the debt-limit law. Aguirre is hoping his challenge will be the first.
If he succeeds, other municipalities that suffer deficits in their retirement plans could look to Aguirre’s case as a bellwether for eradicating the funding gaps.
Attorney Pat Shea, who represented the county of Orange when it underwent municipal bankruptcy in the 1990s, said governments can usually find a loophole to evade the law. However, Shea said he believes a pension deficit creates the model scenario for challenging the great expense as violation of the debt-limit laws.
“It’s the unusual, perfect storm scenario that the obligations you’ve created are truly debt, that it’s a big amount of money, and that nobody knows how it’s going to be paid,” said Shea, an adviser to Aguirre. “It’s very rare how many debts are like that.”
However, the city attorney’s argument faces a hurdle that will be difficult to overcome.
Both the judge overseeing the case and an attorney for the retirement system have noted that the city is beholden to the debt-limit provision – not the target of Aguirre’s suit, the retirement system.
“You can’t sue [the retirement system] for something that only the city can violate,” said Michael Leone, the attorney for SDCERS. “Even if the limit is exceeded, it was the city that took on the city.”
The Superior Court judge presiding over the case, Jeffrey Barton, noted a similar concern in his tentative ruling. He said he won’t make a decision before next week.
“Can the City prevail in this action when it is the City’s actions that allegedly violated the debt limit?” Barton wrote in his preliminary opinion.
Aguirre maintains that the city can win the case on the debt-limit argument. He claims officials at SDCERS approved the deals that allowed the city relief from its bills despite having knowledge that their actions would lead to new debt for the city.
The city attorney argues that pension trustees knew retroactive benefits given to employees in 1996 immediately piled $76.7 million of new debt onto the city. A $30 million reduction in the city’s pension bill that year was also a violation, he said.
“It was a sham,” he said.
Nonetheless, experts agree that Aguirre would have an easier time arguing his point if he represented a taxpayer instead of the government that created the debt.
“You don’t usually get a city suing itself, saying, ‘We screwed ourselves,’” Leone said. “It’s usually the public who will say the city incurred the debt improperly in our name.”
Shea said he finds the debt-limit argument much more appealing than the conflict-of-interest allegations because he thinks other cash-strapped governments with pension holes can benefit from this new warning sign. However, he recognizes that Aguirre’s position within the city could complicate the argument’s success.
“It’s hard to distinguish one entity from the other. Both participated notoriously, joyously, enthusiastically in burying the city in debt,” Shea said.
But, he said, “Mike’s only able to do certain things. It probably would have been better if it were brought on behalf of a nominal taxpayer.”