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Fall From Frugality Puts San Diego on Fiscal Brink

A city once known for good management has a pension plan more than $1 billion in the red.

September 01, 2004|Tony Perry | Times Staff Writer

SAN DIEGO — Somewhere in tax-fighting heaven, Howard Jarvis must be spinning.

The city that the late sponsor of Proposition 13 once extolled as nonpareil in its stewardship of public money ("If all cities were run as well as San Diego, we wouldn't need Proposition 13") is now caught in a financial crisis of colossal proportions.

Not one caused just by a downturn in the economy, although it has that feature. Not one caused just by a bad deal with a pro football team, although it has that, too.

Not even one caused mainly by a severe cutback in state support, although that's part of it as well.

No, San Diego's financial problem is largely of its own making. By underfunding its public employee pension program, the city is now so deeply in the red, critics assert, that without drastic action, pension payments will virtually suck the treasury dry.

Wall Street has lowered the city's bond rating. Moody's now rates the city's general obligation bonds at Aa3, the same as San Francisco and -- embarrassingly for San Diego leaders -- one level below Los Angeles. The lower rating potentially will pile on hundreds of millions of dollars in additional interest costs for building projects.

The city's pension program has an unfunded liability -- a shortfall -- of $1.157 billion and growing. Add the bill for medical care for retirees and the tab goes up another billion or so.

"San Diego is in a real mess," said Scott Barnett, former executive director of the San Diego County Taxpayers Assn. "All the bad financial news is coming together at the same time, and the city is facing a load of hurt."

When the booming stock market made the city's pension accounts flush, San Diego officials sweetened benefits for city workers. Then the market crashed and they were left with much less money in the bank and bigger bills coming due.

Lots of other California cities and counties have similar problems, but this is San Diego, where fiscal conservatism was thought to be the civic religion.

"We found that the emperor has no clothes," said Carl DeMaio, executive director of the San Diego-based Performance Institute, a Libertarian think tank, studying the city's budget and budgeting process.

The crisis arose quickly -- one study points to 2000 as the key year -- but could take decades to resolve even if the City Council is forced to make painful choices.

Among those possible steps -- things that have long been considered anathema -- are cutting pension benefits, borrowing a lot of money, trimming the payroll, privatizing some services, and telling residents that services are going to be reduced even though the city already has fewer police officers and firefighters than almost any comparably sized municipality in the nation.

Like the fellow who borrows money from the neighborhood loan shark, the city finds itself barely able to pay the weekly interest while the principle gets larger and larger and the threat of dire consequences grows.

The City Council this year opted to trim library hours, close swimming pools and essentially abandon the filling of potholes in the streets.

The scandal has blocked the city from refinancing bonds for Petco Park, the new downtown ballpark for the San Diego Padres -- costing it millions in higher interest payments.

Securities and Exchange Commission regulators and the U.S. attorney's office are sniffing to see if someone should face charges for filing incomplete statements with Wall Street prior to the selling of bonds.

The pension board, which advises the City Council, has sued its counsel for allegedly providing inadequate advice. Two lawsuits were filed by retirees who fear the city will end up defaulting on pensions.

Officials who initially downplayed the crisis now admit that this year's problems could be only a faint taste of what may come.

Mayor Dick Murphy, a mild-mannered Republican now running for a second term, believes his critics are sensationalizing the issue.

"We have a pension situation that is a serious problem, but it is a problem that can be solved with some discipline," he said. "It's not a crisis; it's a problem, and we have a plan to deal with it."

In many ways, Murphy is reprising the role he played during last year's disastrous wildfires: offering reassurance to a panicky public that the city, though bloodied, will survive.

Still, the city's own pension reform committee has warned that only a "miracle" in the stock market will bail out the city unless drastic and politically combustible action is taken, including capping benefits for current retirees and reducing them for future pensioners.

Amid controversy, the two city officials closest to the budgeting and bond process -- City Manager Michael Uberaga and City Auditor Ed Ryan -- have quietly retired.

"It's an ugly, ugly situation," said Jack McGrory, former San Diego city manager and now executive director of a land development company.

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