The Morning Report
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The specter of bankruptcy won’t go away for the city of San Diego.
For more than five years, after every pension crisis, revenue crisis, ballot crisis and any other crisis the discussion ends up returning to discussions about the city’s financial future.
With the failure of Proposition D, a sales tax and fiscal reform ballot measure that would have eased pressure on the city’s deficit-plagued budget, San Diego’s most public bankruptcy proponent made a new pitch today.
Former City Attorney Mike Aguirre said Prop. D’s collapse shows the city meets the key test for municipal bankruptcy: It is insolvent. The cuts to city services discussed during the campaign by Mayor Jerry Sanders — police officer and firefighter layoffs, reduced park maintenance and closed recreation centers and pools — prove it, Aguirre said.
“A city is insolvent when it can’t provide its essential services to the public,” Aguirre said.
Aguirre sometimes promoted bankruptcy while city attorney and eventually lost his reelection bid in 2008. Sanders and Aguirre’s replacement, Jan Goldsmith, have been steadfast in their opposition to bankruptcy. Yet talk has persisted, particularly in the last year. A task force of business leaders said bankruptcy was an option in a report on city finances last fall. San Diego County’s civil grand jury recommended the city convene municipal bankruptcy experts. Both reports prompted the city to post letters on its website to potential investors denouncing bankruptcy.
City Councilman Carl DeMaio called parts of the comprehensive financial plan he released on Friday “borrowing from bankruptcy.”
The only debt the city would address in its bankruptcy filing, Aguirre said, is its pension liability. The city could tell its bondholders it didn’t plan to renege on any other debt and solely go after the benefits Aguirre says were granted illegally through pension underfunding deals in 1996 and 2002. That should help erase bankruptcy’s stigma, he said.
But attacking pensions through bankruptcy is the same legal maneuver scorned by Sanders and Goldsmith. They note, correctly, no municipality has done it before.
On Friday, Sanders said he welcomed “good ideas” on the city’s financial problems and said he would forward DeMaio’s plan to the business task force for review. Sanders’ position on bankruptcy, however, hasn’t changed.
“The mayor said he welcomes all good ideas,” mayoral spokesman Darren Pudgil said. “We have yet to see one from Mike.”
Similarly, Goldsmith has said he would publicly speak out again against bankruptcy now that the election’s over.
We took an extensive look at pensions and municipal bankruptcy last February. Our conclusion:
It appears legally possible for a city to reduce pension benefits through bankruptcy. No one has tried it before, but someone will. That bankruptcy will be a costly war with an uncertain outcome.
At the least, attempting to reduce pension debt through bankruptcy would be a significant risk. Aguirre said the city’s bankruptcy plan would force retirees to justify their benefits.
“If we file a plan that only recognizes the legal benefits, I think it’s going to be a hard case to make for a pensioner to come forward and say, ‘I didn’t pay for this credit, but I want the benefit for it anyway,’” he said.