Mayoral Candidate Shea Offers Detailed Reorganization Plan

Tuesday, February 06, 2007 | Mayoral candidate Pat Shea drew a stark line between his campaign and those of the rest of the mayoral pack Wednesday, revealing a unique, in-depth plan to restructure a city government awash in deficits and investigation through the federal courts.

The attorney wants to take the city directly into Chapter 9 municipal bankruptcy proceedings, saying such a platform is the only way to tackle the raft of regulatory, investigatory and financial issues that hamper city business daily.

“This structured approach is the exact plan that was created by Congress to deal with this very situation: a municipality in great financial distress needing structural finance refurbishment,” Shea said.

Shea — well-known in political circles but virtually unknown in neighborhood cul-de-sacs — released the details yesterday of how the complete overhaul would work, from the forced renegotiation of employee pension benefits to settlements with agencies such as the Securities and Exchange Commission.

His plan starts with one basic assumption: the entire pension deficit is illegal.

It also starts with one basic goal: to remove the public stigma surrounding the word “bankruptcy.” Shea said municipal bankruptcy differs greatly from personal and corporate bankruptcy in that, among other things, it protects the city’s assets.

“What happens is, all of the sudden we start spending our time, our money, our energy, on the things that are building San Diego for the future, instead of what we’ve been doing for the last three or four years, which is spending all of our time, money and energy cleaning up the mess behind us,” Shea said.

Completed audits and restored credit ratings would also come quickly in a process he said would take 18 months.

The alternative, he said, is an ineffective, piecemeal package that includes selling land, levying a pension tax against homeowners and cuts in city services. Even then, Shea said the endpoint will still be bankruptcy.

“This is a formula for disaster,” he said.

For years, Shea and his wife, pension whistleblower Diann Shipione, have been among the most vocal in claiming that the city’s problems were much worse than what leaders were admitting. Time has proven them correct in many respects. In outlining his plan, Shea gave an in-depth inventory of what he conceives to be the city’s weighty ills.

He also placed the pension deficit, which now dominates the city budget and is the center of numerous local and federal investigations, at $6.2 billion. The city-stated figure is $1.37 billion. But Shipione — whose warnings drew initial public attention to funding problems and alleged corruption within the pension system — believes that a number of accounting methods artificially reduce the publicly-stated numbers.

Shea gained fame as one of the lead attorneys who restructured Orange County in the largest and most publicized municipal bankruptcy case in national history. He said that under his plan the city would:

— Immediately assert that all pension benefits have been created illegally and no money is owed from the city to the retirement system. Such a declaration would force the unions to the bargaining table, he said, driving city and union officials to craft new benefit packages that are legal and payable.

— Establish which employees have a legal claim to receive retiree health care benefits. Shea is the first candidate to tackle the retiree health issue, which some believe could be just as severe a problem as the pension deficit. The city currently carries an estimated $500 million to $800 million in future unfunded retiree health care costs, a long-term expenditure that grows annually. Debate exists as to which employees are actually guaranteed such coverage. Many governments across the country face a similar problem in this respect.

— Maintain payments on municipal bonds, public debt and commercial contracts, leaving the city in good standing with credit rating agencies and satisfying investors who could have been defrauded by the city’s failure to report its true financial problems.

— Assist in the investigation and prosecution connected to any illegal acts. (In addition to the SEC investigation, the U.S. Attorney’s Office is investigating possible political corruption in connection with the pension system. The District Attorney’s Office has charged six former and current pension board members with felony violations of conflict-of-interest laws as part of an ongoing investigation into City Hall.)

— Restate city financial disclosures in compliance with new Government Accounting Standards Board requirements.

— Settle claims with outside third parties — such as developer Roque de la Fuente, who is owed about $100 million by the city — and suing individuals and third parties that had a role in creating the debt Shea says is illegal.

“We restructure the obligations. And the people that cooperate with us, the union people that participate with us get an agreement in advance of going into Chapter 9 and they get a general civil lease for all claims the city has against them,” Shea said. “Anyone who wants to argue their case in court can do so, but of course we reserve the right to sue them for their participation in the creation of this debt.”

Shea’s opponents in the July 26 primary election include City Councilwoman Donna Frye, former police chief Jerry Sanders, businessman Steve Francis, taxpayer activist Richard Rider and Harley-Davidson dealer “New York” Myke Shelby.

All have said bankruptcy isn’t necessary to solve San Diego’s problems, but all have stated a desire to test the legality of pension benefits granted between 1996 and 2002 and try to renegotiate multi-year labor contracts just ratified last week by the City Council. 

Many members of the current political leadership have said that any talk of bankruptcy is irresponsible, however no clear plan has emerged for dealing with a pension deficit that hogged most of the city’s new revenues in the proposed 2006 budget. City Attorney Mike Aguirre said he is planning to challenge the pension benefits in court, whereas some council members have said such a proceeding would be long and costly with uncertain ends.

Some involved in the Orange County bankruptcy have pointed out that it is a costly endeavor, and likely could have been avoided.

Shea deflects such comments, saying Chapter 9 was a success in Orange County a decade ago.

“It’s the only way out of our problems, and we should just embrace that,” he said. 

To drive home his point, Shea focused on recent discussion of levying a pension tax, an option granted by the city charter to the City Council to cover its pension debts. The charter reads, “the council, if necessary, shall levy annually a sum sufficient to meet the requirements of the pension funds herein provided for the police and fire departments and the City Employees’ Retirement Fund.”

He stood in front of a home in the Loma Portal neighborhood and said that using calculations of a $6.3-billion pension deficit, the owner of a $450,000 home would be asked to pitch in $51,000 to cover the pension debt.

The special election is being held to replace Mayor Dick Murphy, who announced his resignation in April under the weight of the pension scandal. His final day will be July 15.

See a chart outlining Shea’s financial plan. (This is a PDF file that requires Adobe Acrobat Reader software, which can be downloaded for free here.)

Please contact Andrew Donohue directly at