San Diego May Use Bankruptcy to Roll Back Benefits: Joe Mysak

San Diego May Use Bankruptcy to Roll Back Benefits: Joe Mysak

Commentary by Joe Mysak

June 16 (Bloomberg) -- The city of San Diego should consider Chapter 9 municipal bankruptcy to help it reduce fringe benefits, pension and health obligations.

That’s one of the suggestions made by the San Diego County Grand Jury, which does the normal duties of recommending indictments as well as reporting on local governments and special districts.

San Diego is the fifth major city in the U.S. this year, and the second in California, where people are talking about bankruptcy as a means to “restructure and reorganize their assets and debts while providing relief from current and future obligations,” in the words of the grand jury’s 22-page report, published on June 8.

San Diego has unfunded liabilities of $2.2 billion in its pension plan and $1.3 billion for health care, which the report calls “unsustainable.”

More than two years of cutting budgets and the mounting public pension crisis have made the unthinkable an option, maybe even an attractive one.

“Municipalities are not required to raise taxes or cut costs to the bone before filing for reorganization under Chapter 9,” the grand jury report says, quoting from a presentation at an October 2009, San Diego County Taxpayers Association seminar.

Open Discussion San Diego has been wrestling with pension and benefits costs for years. In 2006, the city settled fraud allegations by the Securities and Exchange Commission for failing to disclose to investors that its pension system was underfunded.

The recommendation that the mayor and city council convene a panel of municipal bankruptcy experts to talk about it is the last of 16 suggestions made by the grand jury. That it was made at all, in a wealthy city like San Diego, is disturbing.

“It will be difficult to make the case that the city is insolvent,” said Natalie Cohen of National Municipal Research Inc. in New York in an e-mail this week. “It seems the grand jury report is looking to bust open the discussion about the irrevocable nature of pension obligations -- which will continue to eat up the city’s budget.”

As the report says in its introduction: “One of the underlying causes of the current structural imbalance is the underfunding of the city’s pension obligation by previous city administrations.”

This is a familiar story, both in California and around the country. As of June 30, 2009, the San Diego City Employees Retirement System has only 66.5 percent of the money needed to pay for future pension obligations, according to the report.

Punish the Public

The report contains an extensive discussion of San Diego’s retirement system, and recommends that the city investigate replacing it with some sort of alternative.

Among the report’s other recommendations are having someone else run the libraries, selling portions of parks and charging for trash collection: a fairly standard grab bag.

There’s also a little discussion on how to reduce headcount.

Did you ever have a feeling that there’s a vindictive element to some of the cuts governments do manage to make? That is, when they are absolutely at the end of their tethers and are forced to fire people, did you ever think that the government somehow (and unbelievably, if you ask me) tries to punish the public? It’s almost as though those in charge say, “Fine, we’ll cut back, but you’ll never have clean streets again.”

In other words, if the city makes cuts as painful and obvious as possible, we’ll all learn our lesson. I’m not sure what the lesson is. I suspect it depends upon who you are. Don’t lose your job? Offer to pay more taxes? Don’t ask if government might run more efficiently ever again?

There’s a hint of this in the grand jury report.

Too Many Managers

The city, it says, acted “improvidently” in cutting the public safety workforce, such as mounted patrolmen and the canine unit. Meanwhile, “there are now anywhere from seven to nine layers of costly management between the mayor and a blue- collar worker in the field.”

The recommendations: “Eliminate redundant positions and extraneous levels of management and supervision as employees leave city service through attrition,” and “Restore the cuts to public safety personnel as a priority.”

There’s a startling level of clarity in the grand jury report on the city of San Diego’s financial crisis. I just hope it hasn’t come too late.

--Editors: James Greiff, Steven Gittelson

Click on the “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.ne

http://www.businessweek.com/news/2010-06-15/san-diego-may-use-bankruptcy-to-roll-back-benefits-joe-mysak.html