The Nightmare Continues

Note: Carl hosted the Café San Diego on Tuesday.

Tuesday, May 1, 2007 | Last week I read with complete amazement City Council President Scott Peters’ posts in Café San Diego where he dismissed the notion that the city of San Diego still faces a financial crisis and proudly proclaimed “Our Long National Nightmare Is Apparently Over.” Peters then continued on to bemoan why the city’s papers aren’t trumpeting the good news of restoration of the city’s financial health.

Reading through the posts (which even includes one that defines Jim Madaffer as the epitome of “leadership”) it was like listening to an alcoholic who refuses to admit he has a problem. But then I remembered that this is not about fact or even interpretation, it is about politics.

Of course, Peters (and the other members of old guard that used to run City Hall) would like the public to believe we are no longer in a crisis. After all, without a crisis, they can try to stifle the mayor’s efforts to reign in runaway spending at City Hall. More importantly, without a financial crisis, maybe they can rehabilitate their political careers to run for another office.

Fortunately, the public is not easily fooled. Two weeks ago, the Performance Institute released a poll of San Diegans showing a whopping 43 percent of residents still view the city as being in a “crisis” with an additional 33 percent of residents viewing the city finances as “failing.”

No matter what label you put on it, the city of San Diego faces a severe financial crisis that extends beyond the pension system to encompass a myriad of financial liabilities. The city’s most pressing financial liabilities are laid out in the comprehensive five-year financial forecast and plan created by Mayor Jerry Sanders. (If you have not yet read through it, please do.)

The city faces eight key liabilities that, at the current tab, amount to more than $3 billion in unfunded needs. And that’s not even counting burgeoning liabilities in the water, sewer and community infrastructure that could amount to an additional $2 billion to 3 billion five years from now.

• Pension Fund: The city’s pension debt stands at $1 billion. That’s down a bit from last year. Before you drink Peters’ Kool-Aid, we should recognize that the improvement in the pension stems from whopping 11 percent investment return last year (above the assumed 8 percent), a massive one-time influx of $104 million in tobacco settlement monies, and one-time actuarial smoothing adjustments. Banking on double-digit returns every year and one-time windfalls is partly what got us into this mess. Under the best case scenario, the city will have to divert revenues for 20 years to pay off this debt.
• Retiree Health: The city faces an additional $1 billion for unfunded retiree health obligations — and that estimate assumes a modest annual increase in health care costs of 5 percent for the next 30 years.
• City Reserves: The city’s reserves (to be used in emergencies and for unexpected and unavoidable expenses) are woefully low — roughly 3.5 percent of the general fund currently. The lower our reserves the higher our interest rates on debt. The mayor rightfully suggests funding our reserve to 8 percent, which would require an additional $70-80 million between now and FY 2012.
• Deferred Maintenance: Anyone who has driven on city streets or has visited a fire station can tell the city’s streets and infrastructure are in disrepair. So much so that the city faces $900 million in deferred maintenance liabilities. In some cases, the city probably has “passed the point of no return” where simple repairs are no longer enough — complete replacement of the facility or asset will be required.
• Storm Water Permits: Driven by new mandates, the city will face an annual liability of $40 million to 50 million to enforce and comply with the latest storm water permit.
• ADA Requirements: An additional $10 million per year will be required to bring the city into modest compliance with the Americans with Disability Act.
• Workers Compensation: The city faces $150 million in outstanding claims, but has only $18 million in reserves.
• Public Liability Fund: Again, the city faces $100 million in outstanding claims, and as of Dec. 31, has $0 in reserves. Meanwhile, the city’s legal liabilities are mounting (can you say Sunroad?) as we witness the impact of the city attorney’s various legal shenanigans. Expect this liability to grow…
• Not on the List: Water/Sewer System Upgrades The five-year financial plan does not include the $1.3 billion in current water-sewer system upgrades mandated by the recently approved consent decree with federal and state regulators — and paid for by the largest increase in fees in the city’s history. That increase still left hundreds of millions in projects on the table and now there is talk of an additional $1 billion for the secondary sewage treatment mandate.
• Not on the List: Neighborhood Infrastructure: The five-year financial plan addresses “deferred maintenance” on existing city facilities and infrastructure, but does not include the nearly $2 billion to 3 billion that some development experts have opined is needed to expand basic community infrastructure throughout the city to meet population growth from the past decade — let alone serve new residents who arrive each year.

For example, the Fire Department recently lost its accreditation status in part due to fire station coverage being inadequate for the city’s population. As the population grows, at some point we must address the need for expanded public infrastructure in our communities.

We applaud the mayor for devising the first comprehensive diagnostic framework for disclosing these looming financial liabilities that he inherited. That being said, even the mayor says that his five-year plan pays down, but does not pay off, these liabilities. The plan leaves little room for error — assuming zero salary increases in the next four budget cycles. What’s worse, even with all the belt-tightening at City Hall, we will still be in the hole — though perhaps not as deep.

In the end, the essence of Scott Peters’ argument seems to be that as long as the city can pay its bills, we are not in a crisis.

My good friend April Boling hosted Café San Diego two weeks ago and used the story of “Bertha” to illustrate just how absurd this notion is. (If you missed her postings, like the mayor’s five year plan, they are required reading to understand the mess San Diego is in.)

If April’s analogy with Bertha doesn’t convince you, in my next post, I’ll share some hard numbers from the budget that illustrate just how severe the financial problems facing the city really are.

Crisis? Nightmare? Or just politics as usual in San Diego? What do you think?

Carl DeMaio is the president of the Performance Institute. Send a letter to the editor.