When it happens, they say, it happens in a hurry.
"It" is bankruptcy, and many believe it's already happening, in a certain form, to the city of San Diego. Adhering to the commonly used definition of bankruptcy, one could argue it already has.
Bankruptcy: the quality or state of being bankrupt.
Bankrupt: a person [or a city] who becomes insolvent.
Insolvent: (1) unable to pay debts as they fall due in the usual course of business (2) having liabilities in excess of a reasonable market value of assets held.
With a $1.4-billion pension debt the city can't pay and more liabilities than assets-not to mention ongoing fraud and corruption investigations by federal and local agencies-San Diego appears to fit that definition. But both Mayor Dick Murphy and City Manager Lamont Ewell continue to call any talk of bankruptcy "irresponsible."
"The reason it is irresponsible is credit-rating agencies have big ears, and when they hear the bankruptcy word, it concerns them," Murphy told CityBeat, "and the impact of that is they could lower our credit rating and raise our interest rates."
But when yet another rating agency lowered the city's credit rating last week, just hours before Murphy unveiled his proposal to steer the city's financial ship back on course, the agency, Fitch Ratings, cited "continued delays in the release of the city's" 2003 audit and "ongoing political struggles," not talk of bankruptcy, as reasons for concern. And a growing crowd-joined last week by former San Diego mayor and former California Gov. Pete Wilson-is questioning whether it's irresponsible not to contemplate all of the city's options and urging Murphy and the City Council to seriously consider filing for bankruptcy.
But the loudest voice advocating a voluntary move toward federal bankruptcy court belongs to attorney Pat Shea, who for months has claimed that bankruptcy is not merely an option but an inevitability. And having represented many government creditors in 1994 when Orange County filed for Chapter 9 bankruptcy-a financial shelter specially designated for municipalities and government entities-Shea's words carry the added weight of experience.
But in recent weeks there's been a lot of whispering about Shea's connections to key players in the city's financial mess, and some insist he has ulterior motives for promoting bankruptcy, including financial gain, a plan to make City Attorney Mike Aguirre mayor and a grudge against Murphy.
Shea does have some strong ties to people involved. He's married to whistle-blowing pension board Trustee Diann Shipione and a close friend and confidant of Aguirre. He also supported U.S. Attorney Carol Lam, a friend, for appointment to her current office, which is presently investigating corruption among yet-unnamed city officials.
As for his own financial gain, Shea told CityBeat he has no interest in representing the city if it files for bankruptcy. And he shrugs off the notion that he is the mastermind behind a plot to make Aguirre mayor.
However, when it comes to Murphy, Shea admits there is little love lost. Former partners together in the law firm of Luce, Forward, Hamilton & Scripps, Murphy presided over Shea's wedding. But the pair hasn't spoken since butting heads over a proposal to build a South Bay cargo airport, known as Brown Field, in 2001, a project that Murphy successfully opposed. But rather than serving up ice-cold revenge, Shea insists he is simply playing the role of the "loyal opposition," providing the city with an alternative course of action.
From Shea's view, bankruptcy court offers the city a platform complete with the experts and resources it needs to face its problems head on and get back on its feet quickly. During a bankruptcy sales pitch at a recent Catfish Club luncheon, Shea told the crowd that "Chapter 9 is so fantastic that, literally, if you were all mayors you would want to file...." He explained that Chapter 9:
* Demonstrates to creditors and Wall Street that the city is willing to solve its problems all at once.
* Gives the court the ability to compel the city to disclose all of its financial information and makes any failure to do so a federal crime.
* Allows the city to start from scratch with clean financial and accounting statements.
* Lets the city establish a viable payment plan for competing creditors.
* Gives unions the opportunity to renegotiate agreements the city can afford and allows for subsequent negotiation as soon as the city emerges from bankruptcy.
Shea also challenged some of the common misconceptions about bankruptcy, noting that Chapter 9 doesn't:
* Take control of civic issues away from elected officials and give it to a judge.
* Allow a judge to compel the city to sell public lands or impose taxes to cover the city's debts.
* Require the city to use its entire general fund to pay off debts; rather, only those it can afford before discharging the rest.
* Further damage the city's already suspended credit rating.
But despite Shea's sunny portrayal of bankruptcy, so far, the city isn't interested. Deputy City Manger Bruce Herring told CityBeat the city is "approaching this more from a positive-solution point of view.
"We have not looked seriously at the bankruptcy option because it's our understanding that in the case of municipalities, bankruptcy is generally considered only when there are insufficient funds to meet operating costs, and in our case that's just not what's happening this year," said Herring. "We have sufficient cash resources to meet our operation expenses. We have appropriated reserves that are substantial," he said, citing $39.2 million the city has on reserve and another $1.2 billion in investment pools.
"The city has $2 billion worth of revenues coming in between all of the departments," Murphy told CityBeat. "The alternative is to cut spending to meet that revenue. We don't need to do bankruptcy-it's fully unnecessary."
Last Wednesday Murphy unveiled a plan approved unanimously in closed session by the City Council to cut spending, starting with the city's four labor unions. Murphy said he hopes to cut the pension deficit in half over the next two years by issuing $400 million in pension obligation bonds and:
* Instituting a two-year salary freeze.
* Adopting a two-year freeze in benefit increases.
* Increasing employee contributions to the retirement system or reducing salaries by 3.2 percent.
* Reducing pension benefits for new employees.
* Reducing retiree medical benefits.
* Implementing a mandatory five-day work furlough for all city employees.
But the city can't issue bonds until it gets its hands on a long-delayed 2003 audit, and the city's plan to finance the pension debt by asking employees to make sacrifices was met with an icy reception from union leaders. And while Aguirre said he supported the City Council's proposal, he also said he wants to take additional steps in the coming weeks to further reduce the pension debt.
Johnny Perkins, lobbyist for the San Diego Firefighters Association, welcomed the city back to the bargaining table and called the proposal a "good start." While he rejected the bankruptcy option outright "as a failure of leaders to come together to solve a problem that's solvable," Perkins told CityBeat that his union, one of the most politically powerful in the city, wouldn't "agree to anything that is to the detriment" of its members.
"We don't believe that the city should balance its financial problems at the doorstep of firefighters," he said, adding that he wants the city to bring a complete accounting of its expenses to the bargaining table so that the firefighters can help identify other expenditures-specifically mentioning the city's 6-to-6 after-school program-to cut before reducing firefighter pay.
Shea said he's heard similar talk before and warns that it's a formula for disaster. He explained that if the unions simply pass the tough decisions off to other constituencies, it will ultimately force the city into bankruptcy.
"That leads to paralysis, and that's what kind of flipped Orange County into a Chapter 9," he said.
If the unions and the city can't come to an agreement, Murphy, with full City Council support, has the option of forcing the unions to accept his terms for one year and could vote to impose those terms again in future negotiations. But Kim Ruben, a public finance economist at the Public Policy Institute of California, said the unions ultimately hold the trump card. Reuben says one good lawsuit from the workers demanding that the city pay its pension debt could also force the city into bankruptcy.
Reuben noted that this puts the city into an oddly familiar situation. Just as in 2002, when the City Council approved a plan that granted increased benefits in exchange for the ability to further under-fund the pension system, the city is facing a debt it can't afford to pay and is looking to the unions for a way out.
"The only difference between then and now is the fact that the public is not going to let them do it this time," said Shea. "They have actually got to deal with it."