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Monday, July 22, 2013

How the City of San Diego Avoided Bankruptcy


http://www.utsandiego.com/news/2012/jul/14/how-san-diego-avoided-bankruptcy/all/?print

How San Diego avoided bankruptcy


Three California cities file for bankruptcy in less than two weeks.
Had that recent headline appeared six or seven years ago not many people would have been surprised to see the city of San Diego in that ignominious group.
It may not seem like it but San Diego’s pension debacle, which caused The New York Times to dub the city “Enron by the Sea,” could be viewed as a blessing in disguise. The backroom deals that created a massive financial mess were exposed nearly a decade ago, forcing city leaders to push for unheard of pension changes and employee concessions well before the recent recession revealed sizable pension deficits were commonplace throughout the country.
If San Diego hadn’t made those moves, it may have joined the ranks of San Bernardino and Stockton which both filed for bankruptcy, in part, because of benefits promised to their workers. The third city to go bankrupt was Mammoth Lakes, but its troubles stemmed from a developer winning a $43 million judgment against the city.
The list of municipal bankruptcies is expected to grow as more cities speed toward a financial cliff that San Diego was able to avoid but not without a significant sacrifice to basic services, such as public safety, libraries and parks.
Thom Reilly, a San Diego State University professor and former chief executive of Clark County, Nevada, said San Diego was once a poster child for all that’s wrong with public employee pensions but has now emerged as a model for other jurisdictions on how to fix the problem. He said the city benefitted by having its unsustainable pension system exposed way before it became a national issue.
“San Diego is ahead of the curve because they went to such efforts to keep their self-dealing secret and it really came to light even before it exacerbated with the recession,” Reilly said. “So they began working on making substantial changes to their pension system, public pay and retiree health care. … In many jurisdictions, not just in California, I think it’s just been in the last couple years that they’ve had a better understanding of what these promises are and how substantial the costs are.”
To be sure, the circumstances in San Bernardino and Stockton are much different from in San Diego. For example, the unemployment rate in those cities is double that of San Diego, foreclosure rates are sky high and a significant number of residents receive some form of public assistance. In other words, San Bernardino and Stockton are working-class cities that have been battered much more by the economic downturn than San Diego.
Steve Erie, a University of California San Diego political-science professor and co-author of “Paradise Plundered,” a book on the San Diego’s political history and financial problems, said the services provided in San Bernardino and Stockton are likely much more robust than in San Diego because they didn’t make the same sacrifices over the past decade. That will change now, he said.
“They have to close fire stations; we just never built them,” Erie said. “San Diego, ironically, even though it decided not to go into bankruptcy, is a model for what these cities will look like when they come out of bankruptcy: Lower public services and changes in pension systems.”
While San Diego is no longer on the brink of bankruptcy, that doesn’t mean all is well in America’s Finest City. The city is still saddled with a nearly $2.2 billion pension deficit, $1.8 billion in future payments for retired workers' health benefits and a $900 million backlog of street, sewer and building repairs.
It will be generations before those debts are paid off, debts created by promises made by past city leaders over the last three decades.
Still, it’s a far cry from 2005 when a mayoral candidate ran solely on the platform of San Diego filing for bankruptcy. Current Mayor Jerry Sanders, who has always opposed bankruptcy, won that election and steered the city on a slow but steady course toward financial redemption.
The first step came before he took office when the city eliminated several benefits for new hires, such as supplemental pension checks and the ability to collect a pension and salary simultaneously. Sanders then brokered a deal with labor to significantly reduce the size of pensions for workers hired after June 30, 2009. Next came other labor concessions such as across-the-board 6 percent compensation cuts for nearly all city workers and forcing employees to pay more out-of-pocket toward pension costs.
San Bernardino and Stockton have cut their workforces significantly to make ends meet in recent years but haven’t received nearly as much in labor concessions as San Diego. For example, San Bernardino employees don’t contribute any money toward their pensions; taxpayers foot the entire bill.
Sanders said he sees a lot of what went wrong in San Diego also took place in San Bernardino and Stockton, such as masking the true financial picture from the public and using one-time money for ongoing expenses.
“That’s something the city of San Diego did for years and years and years … but the employee compensation they never cut because that was too tough politically,” he said. “I think that’s what you’re seeing in these cities is it’s always revolving around the fact that it’s labor costs that have thrown them into bankruptcy. What that means for the community is they’re not getting services anymore.”
Sanders said his city has endured a decade of financial pain, but it may have been exactly what City Hall needed to get its act together.
“In the long run, it is going to be a tremendous blessing,” he said. “I think that we learned some strong lessons and I think the public has been much more willing to pay much more attention to city government. And while that’s not always the most pleasant thing in the world because people don’t trust you at all, I think we’ve rebuilt that trust to a great extent. … I think that the community can look forward to better days in the not-too-distant future.”
San Diego continued its pattern of leading the way on pension changes in June when voters overwhelmingly approved an initiative that replaces pensions with 401(k)-style plans for most new city hires. Unions are now challenging the measure before a state agency, saying it violates state labor law.
In a sign that San Diego’s past continues to haunt despite progress, Moody’s Investors Service said it would be a “credit negative” for the city if the initiative isn’t fully implemented and its purported $950 million in savings isn’t realized. The city had its credit rating suspended from 2004 to 2008 because of past financial misdeeds.

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