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In the last couple of weeks, Poway businessman Vince Mudd and a team of his peers have given Mayor Jerry Sanders and other supporters of Proposition D a glimmer of hope that the business community could support the measure.
Proposition D is not just a sales tax. It is a sales tax that wouldn’t go into effect without a certain number of reforms being enacted. Basically, Mudd and his colleagues decided that the City Council would have to get $73 million in savings from those reforms in order to balance the city’s chronically lopsided budget. Neither that level of reforms nor the sales tax hike was enough on its own.
The City Council prepared a resolution and approved it based on Mudd’s report. As that was happening, I knew I needed to talk to one person.
Dick Vortmann. The former president of NASSCO, the shipbuilder, Vortmann has served as a figure with gravitas in the fabric of concern about the state of the city’s finances and the enormous liabilities it assumed. City leaders always seemed to find easy ways to dismiss the worries of whistleblowers and citizen critics. But Vortmann — the tall shipbuilder who speaks in long, impressively complex sentences without losing his thoughts — was never quite as easy for them to marginalize.
He first served on former Mayor Dick Murphy’s Blue Ribbon Committee on city finances, whose report and worries about ticking time bombs like retiree health care costs and pension obligations were notoriously watered down by city staff.
He also was on the board of the San Diego City Employees’ Retirement System in 2002 when it approved Managers Proposal II, the second bargain that both allowed the city to continue underfunding its pension system while also granting employees enhanced benefits. If you’re really into this stuff, I recommend you read the summary of his interview with the high-falutin’ consultant-investigators from Kroll Inc. In that interview, he explains his side of both those controversies.
Vortmann then served on the city’s Pension Reform Committee, authoring a “minority report” that offered a more bleak take on the situation with more draconian recommendations than the official report.
And now, Vortmann is part of this group of business people. Originally organized by the Mayor’s Office to study the city’s finances, they were disavowed by Sanders when their recommendations came out harsh. That’s not the case anymore.
We’ve heard a lot from Mudd. I wanted to get Vortmann’s take.
It was worth the call. I have had to think for a long time, for example, about his answer to my question about whether government employees should enjoy a high level of benefits and wages in order to set a standard for workers everywhere. That comes toward the end and I would love to hear your thoughts.
I interviewed him by phone and my notes took up several pages. So here is a digestible and cleaned up version of our conversation.
I started by simply asking for his take on Proposition D.
Vortmann: Well, let’s start with some simple, indisputable facts: San Diego has had a structural budget deficit for many years now that regularly has been overcome by finessing and budgetary tactics — the most obvious of which has been by simply not paying all of its bills. There were explicit deferrals like MP1 and MP2. And there were less explicit ones. Things like deferred maintenance. I think most people seeing the pot holes in the streets would say there’s a huge amount of it. But not everyone, for instance, realizes our own City Hall does not even comply with San Diego’s fire regulations.
The budgetary situation is not due to the recent recession and investment losses in the pension system as a result of the economic crisis. These certainly exacerbated the problem and brought the city to the point where it ran out of its usual budget gambits to get out of the situation it was in. Instead, the budgetary problem is a product of the extremely high unit cost of city labor — which is high primarily due to pension and retiree health benefits. These benefits are unaffordable by the city and, from a broader perspective, they are unjustifiable by the overall market for employees.
Lewis: What is your take on what the Mudd group has done?
Vortmann: The Mudd group was asked to analyze Proposition D, not to recommend a position on it. As it is worded, the only thing Prop. D guarantees is that there will be roughly $100 million in new taxes for five years. The citizens of San Diego are not stupid. A simple logical question presents itself with the voting of Prop. D: The reforms talked about could have been, and should have been, implemented by this City Council already. They should have been, and could have been, implemented when the City Council desperately needed that money. Why weren’t they?
Now they’re saying: “If you give me $100 million a year, now, I have 100 million fewer reasons to do the reforms. Now trust me and I will do the reforms I chose not to do when I desperately needed to.” The logic doesn’t make any sense. Why would I believe you if you have 100 million less reasons to go through with it? With the $100 million by itself — plus more finessing — City Hall could basically defer the problem beyond the time horizon of the current incumbents.
If you really want to have a budget that is structurally balanced at the termination of the five-year tax increment, you have to do structural reforms to deal with the underlying problem. You have to reduce the unit cost of city labor or do the services with outside labor — outsourced labor — at lower rates. What we discovered was that, even if you passed it, Prop. D will not be sufficient. You have to also have meaningful substantive reforms.
We also concluded that the five-year budget baseline they’re working from did not comprehend realities. For instance, we added to the ARC an amount of money representing the full funding to retiree health care and that has never been done before. We thought that was absolutely essential. If I’m the union and you’re asking me to make a concession to my health care, but you have yet to commit to fund the remainder I’m going to be dubious.
Once we adjusted the budget, we did the mathematics and concluded that across the 10 reforms in the aggregate you have to get at least $73 million a year of average savings. You also have to put a cap on the restoration of previously cut expenses of no greater than $20 million.
Lewis: What does that mean?
Vortmann: Well, there’s an argument we need the tax to restore brownouts and other services and if you use the tax to restore those services, you haven’t done anything to fix the structural budget deficits. So we said, you have to set a maximum of $20 million spending cut restorations which gives you a net reduction of only $53 million in spending. And when you do the math, and relay on the underlying five-year forecast, at the expiration of the five-year tax, the budget would be structurally balanced.
Lewis: So is it even possible for the mayor and City Council to convince you they’re on that route?
Vortmann: It is not an inconsiderable challenge, let’s put it that way. Every voter has a different threshold of believability. It is our opinion that the way the ballot reads now, there is no credibility. The only guarantee is that they’ll get some bare minimum amount of savings and then the tax will kick in. For outsourcing, the threshold to invoke the tax is to just write a guide. It does not generate one penny of savings until someone actually uses the guide to generate savings. But that is not required before the tax goes into effect. How can voters be convinced someone is going to do something?
This was our attempt to make sense of it. We just worked backward and put a few stakes in the ground. We asked, for instance, how much does it have to have to restore things like brownouts and still get to a balanced budget after the tax expires? I think the business community was dead set against the $100 million tax increase. This enables the business community to challenge city leadership to say show me how you’re going to reach these reforms.
This is an excellent opportunity to come together and share the pain a bit to once and for all get us back to sound fiscal footing.
Lewis: So how will you be voting on Prop. D?
Vortmann: I am voting no unless and until the city can truly convince me that they will, and can, meet the conditions stated in the Mudd report.
One cannot say that if you pass this, the city is doomed to fail. The City Council might wind up doing the right thing and come up with $73 million of reforms. If you want to believe that and rely on that, then if it passes everyone will be happy. But if the City Council doesn’t do the right thing, we will have missed a rare opportunity to achieve a structurally balanced budget and they’ll be back asking for more or an extension of the sales tax because they won’t have dealt with the underlying problem.
Lewis: So what would you do?
Vortmann: If I was God and I was running the city, the very first thing I would do is explicitly recognize that the purpose of city government is to provide services to the citizens; it is not the purpose of the city to provide employment opportunities to its citizens. Then we’d decide what services we need and the most efficient way to provide them. You can either negotiate lower unit costs performed by city labor or have it performed by non-city labor at a lower cost.
Lewis: An argument I find somewhat persuasive, though, is that government should offer its employees a higher benefit and wage scale so as to set a standard in the marketplace for jobs. What do you think of that?
Vortmann: It’s an interesting sociological point of view. If the majority of the residents of the city of San Diego subscribe to that philosophy and they believe they should support a sales tax — which is the most regressive tax disproportionately impacting the least fortunate — so that a select few can set a standard of living for the rest of the world and enjoy much better benefits than the rest of the world, then Prop. D is a shoo-in.