For the Record: Starting to Look Good

Tuesday, Dec. 26, 2006 | Can’t We Just All Get Along? The tortured process of working around the edges of the pension deficit crisis continued Monday with more hearings before Superior Court Judge Jeffrey Barton.

Judge Barton, a week ago, made a series of rulings that directly, and indirectly, could validate, after the fact, the multi-billions of debt looming over the city created from “benefits-for-underfunding” deals and subsequent settlement agreements. The city attorney will appeal, with the mayor’s – but not the council president’s – support.

At Mondays’ hearing, Judge Barton suggested the parties try to “settle” the case outside his court – a wish I am confident he has held for quite some time (see my last post).

Unfortunately, the court’s last set of rulings just about precludes any chance of settlement and almost ensures these matters will be resolved only by appeals all the way through the Supreme Court (at least once), or by the council just deciding to have taxpayers pay an extra hundred million per year to pay it all off. That’s because, with the rulings, as I read them, I can see no reason for, or even ability of, the union representatives to make any concessions.

These rulings likely preclude them from any such concessions, even if every one of them privately desired to do so. Why? Because without a court ruling that puts those entitlements in legal jeopardy, union leaders politically cannot make concessions without losing their jobs, and legally may not be able to make concessions as a result of the normal protections granted to union benefits. Can’t ask people to do what they simply cannot do.

So, in another odd twist to this continuing odd adventure, the court’s rulings of last week may not only have had the clearly unintended effect of actually creating the deficits, they may have also inadvertently precluded the possibility of any settlement of the underlying controversies.

But, Assuming You Could Reach a ‘Settlement,’ How Would It Read? Assuming a “settlement” were otherwise possible in this case, the preliminary recitals of the settlement drafted by the lawyers could go something like this:

Whereas, the city and its unions desired to increase benefits which caused budget problems in 1996, and sought to employ a plan that would intentionally underfund and backload the city’s required annual contributions to the city’s employee pension system (and mandatory 8 percent annual interest thereon) over a course of years in order to present a false image to the public and capital markets of a balanced budget when, in fact, that was not the case; and,

Whereas, the city was rightly concerned that the plan to underfund and backload the pension system would undoubtedly be unsuccessful if the San Diego City Employees’ Retirement System board, in its capacity as trustee for and fiduciary to the members of the pension system, insisted on the city’s actual payment of the full contributions legally required to be annually made to the system, which would likely include civil actions filed by SDCERS against the city to compel full payment unless an agreement to not object could otherwise be obtained; and,

Whereas, the city and certain trustees of SDCERS elected instead to a series of deals, one in 1996 and another in 2002, whereby billions of dollars of unfunded and unbudgeted debt would be secretly created in return for obtaining the approval of a majority of the board of the retirement system to the agreements allowing for the above referenced massive backloading of unfunded and unbudgeted debt; and,

Whereas, certain trustees could receive unique benefit enhancements to their retirements as a result of obtaining the successful approval of the SDCERS board to the above referenced agreements: and,

Whereas, the creation of the billons of unfunded and unbudgeted debt created by these agreements has been unsuccessfully contested in court by the city attorney on behalf of the people of San Diego, and the city must now pay such billions of dollars of debt as fully valid and binding obligations against the people of the city of San Diego, and such agreements have been approved by the parties and court in this case;

Now, therefore…

Whadda’ya think? Not sure this one settles just yet.

Be With Ya in a Second: The KPMG 2003 audit was to have been delivered to the mayor and council the Friday afternoon before Christmas Monday (when no council members would be around to get it and the fewest number of thinking persons who would be interested in reviewing its content). In yet another absolutely not-shocking event on our “road to recovery,” the audit was not delivered. Again.

The voiceofsandiego.org had some good coverage on the continued audit gestation difficulties and there was some good commentary worth reading in the “This Just In” postings last week.

Whenever this “it ain’t happening” occurs – which is becoming fairly frequent – we read suspicions of KPMG’s untoward motivations in delaying that which the lazy press (not the Voice) suggests is the “key” to our getting back into the public-borrowing markets (it’s actually not the audit itself – its what’s in the audit that shows whether we have the money to borrow; that’s different).

We looked at this before and things have not changed. We don’t have the audit because our numbers are goofy and our information is not complete or reliable. And, in those circumstances KPMG has to decide how much they are willing to take on “faith” and how much risk they are willing to assume to get out a document that will clearly be the foundation for future audits done by other firms which will “rely” on the KPMG audit (read, the liability stays with KPMG if they don’t get it right), and if some hoped for massive public borrowings in the future. For KPMG, this is way high wire.

In an Oct. 16 memo, Donna Frye asked some questions about the draft 2003 CAFR that might be enlightening here regarding KPMG’s cautious approach. She asked about the “certification letter” from the city’s CFO and auditor and comptroller (attesting to the correctness of the city’s numbers), and specifically to certain limiting and restricting language used in that certification. The language from the CFO that gave her pause went something like;

[T]he draft 2003 CAFR “does not make an untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.”

Can’t imagine what she found confusing in that. But, in response, Greg Levin, CPA, financial operations manager for the city responded:

“The certification letter was drafted by the Auditor & Comptroller and signed by the Chief Financial Officer. In my opinion, I view this statement to be taking into account the numerous internal control deficiencies and heightened risk of fraud in the City’s Financial Reporting environment. It underscores the notion that absolute assurance can not be provided to anyone regarding the City’s Financial Statements” (emphasis added).

See, these delays are the consequence of our behaviors, not those of KPMG.

Are We All In? In August of this year, we took a brief look at the real cost of the ballpark bonds. The point here was to highlight the real annual cost of private-placement financing when it is not intended to be maintained to term. It gets very pricey – much more so than even the nominal rate actually on the bonds.

In our example, the annual nominal rate on the existing ballpark bonds is actually 7.66 percent. But, if you factor in the “load” (points, fees, etc) used for short term financing, the actual annual rate goes to about 20 percent. That’s per year.

The U-T noted that the mayor intends to bring a ballpark refinancing plan to the council in January. That’s OK, in a vacuum, because the 7.66 percent rate is still high. But, the plan is to refinance the existing private financing with yet another private placement, which will be at non-municipal market rates.

So, you have the possibility of another round of what we are just getting out of. Higher than market rates which look good short term because they are nominally lower than what the city is paying. But, that does not include the “load” which increases the overall amount of debt and may increase the actual annual rate of payment if, like the financing the city is retiring, it is used for (relatively) short term purposes.

Which is exactly what we would want to think, if we are about to re-explode back onto the public markets with our new “spa-tan” appearance festooned in our 2003 “audit.”

But, the fact that we are moving forward with a private placement probably speaks loudly about what out leaders really think about our ability to re-enter the public markets any time soon.

Beyond the somewhat dry reality of this financing exercise, it is an indication that the Mayor’s Office does not foresee that opportunity for the city to re-fi this debt in the public markets for years to come – otherwise the city would not be re-loading a private placement financing now under any circumstance.

History repeating itself. How’d this turn out last time?

Hey, It Was A Great Year: The U-T carried Council President Scott Peters’ list of accomplishments for the year. Mayor Jerry Sanders was on Full Focus last Thursday giving his review of 2006.

Here’s my drive-by on all this:

• Did we substantively take on our massive ($1.4 – $3.4 billion dollar – you choose one) deficit? No.
• Did we get out a 2003 audit? No. (How about 2004 or 2005? – No.)
• Did we start fully funding our pension plan? No. (Even the Judge Barton’s ruling confirms this.)
• Did we have to enter into a consent decree with the United States Securities and Exchange Commission admitting to past intentional misrepresentations of our financial condition to investors? Yes.
• Did city officials acknowledge, and apologize for, doing the very things the SEC consent decree confirmed? No.
• Did we learn anything as a city from that experience? No.
• This was the year we would have a definitive, “final decision on Miramar Airport as the city’s future airport”; did that happen? No.
• This was the year for a final decision and public vote on whether we could keep the Chargers by building them a new stadium. Did that happen? No.
• Are the Chargers an amazingly better team than they have been for, like, forever? Yes.
• This was the year we had to start complying with the EPA requirements for the discharge of “suspended solids” (you sort of know what those are, right?) into our blue ocean. Did that happen? No.
• This was the year we’d determine whether insiders can legally sink the city in massive deficits. Did that happen? Well, at least at the trial court level, yes. The insiders can create massive and crushing billion-dollar deficits even when the city’s general population has no idea that it is about to be sunk.
• Was the city able to kick the city residents’ Men’s’ and Woman’s Golf Clubs and the old retired municipal golfers off Torrey Pines Golf Course so we can get some more bucks from tourists? Yes.
• Were we able to improve our police force in number or service status this year? No.
• Does the city “log” all crime reports coming into the Police Department? No.
• Does that make it seem like crime is going down? Yes.
• Is it? No.
• Did we delay publicly recognizing the reality of our true financial conditions? Yes.

A Rendezvous with Reality: When you write an opinion column like this, you get to present a “view” – might not be the one you like to see, but if you see it, you get to present it.

Donna Frye, the scary projector of the power of organized labor (?) lost the mayor’s race. Joyous festivals rang out among the toadies. Business was saved. (She supported a Chapter 9 bankruptcy to square up the city’s financial condition and give City Hall the opportunity to ask the public for the revenues required to survive. Not certain I see the anti-business theme there.)

The U-T was victorious – in a sense. I know some of those folks, and still can’t quite see what they think is/was such a great victory. It might come to me later.

Aguirre did challenge the billions of magical deficits as everyone in the general population wanted someone to do, so far without success – but who knows in the future? The mayor, smarter than the average bear, knows that the public likes what Aguirre’s trying to do, even if the U-T doesn’t. But he wants not to ire organized labor or the Council President, a roaring advocate for the labor groups (advocating for new “revenues” from the business community to deal with the city’s shortfalls.)

Behind the scenes, there is open talk about trash taxes, selling off Torrey Pines Golf Course and other major public properties, increases in almost every fee imaginable and what ever other revenue producer you can think of.

And, get this.

That looks like the way it’s going to go.

I mean it.

This city is as narcoleptic as anyone could ever be imagined. There is no palpable public outrage. There is barely a pulse. If I were advising the mayor, I’d tell him to roll all theses things out as fast and as hard as he can in the New Year. Nobody will notice.

There have been lots of excuses for not getting our City’s business done.

We “waited” for everything: the V&ampE reports, the audits, the Kroll reports, the audits, selling away the future tobacco revenues, the “strong mayor” issues with the Council, the Chargers decision on the 2006 vote, the audits, Judge Barton’s rulings, the elections, the inaugurations, Christmas, the audits – it just goes on. It’s been over a year. Name one serious thing that got done.

We owe millions and millions more in pension deficit now than we did just a year ago. The water isn’t fixed and the sewers are still broke. We have fewer police officers and they are unhappy. The streets are still in disrepair. We still dump sewage in the ocean.

The big happy beach party rolls on.

We’ll see what happens next year.