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San Diego’s Pension Crisis – The case for municipal bankruptcy

SignOnSandiego.com, January 25, 2010

San Diego could learn from Orange County

By Patrick Shea
SHEA, A SAN DIEGO ATTORNEY, WAS APPOINTED BY A FEDERAL COURT TO REPRESENT THE CITIES, SCHOOL DISTRICTS AND SPECIAL DISTRICTS THAT HAD DEPOSITED MORE THAN $5.2 BILLION IN THE FAILED ORANGE COUNTY INVESTMENT POOL, THE LARGEST MUNICIPAL BANKRUPTCY IN AMERICAN HISTORY. HE IS MARRIED TO SAN DIEGO CITY RETIREMENT BOARD MEMBER DIANN SHIPIONE, AND SERVED ON THE TRANSITION TEAM OF CITY ATTORNEY MIKE AGUIRRE.

February 18, 2005

If municipal bankruptcy under Chapter 9 was instead called “a generous adjustment,” San Diego would be in it and we would be on our way back to financial health.

Unfortunately, Chapter 9 is called “bankruptcy,” and so for political reasons we are unlikely to use this remarkable venue that could move us so far, so fast and so well.

You need to have just arrived here to not know that the city has got itself into a giant financial mess. One that results from real work over a long period of time.

But this article is not about placing responsibility or blame.

This is about the how and why of getting out of the mess.

We as a city owe at least $2 billion to the city pension fund for benefits we have promised for which no money has been deposited. If you wanted to backfill this deficit by paying $1 dollar per second of every hour of every day until fully paid, it would take 64 years.

On top of that, we are no longer welcome in the New York capital markets because we have not been honest in our previous financial disclosures. Some say just an oversight. Perhaps. But the money guys hate it when they don’t get real numbers. And they don’t much care about excuses.

If we can’t get back to the markets to refinance our existing debt, or get new funding for sewers, water and the like, you do not need to read the rest of this article. The city will be in Chapter 9, like it or not.

But, there are reasons to consider using Chapter 9 now for the benefit of San Diego.

I was involved in the Orange County bankruptcy case from its beginning in 1995 to 2000. This is what I learned.

Municipal bankruptcy is a benefit available to cities in financial crisis. But retirement systems or other creditors cannot involuntarily put the city into bankruptcy. So why go?

First and foremost, bankruptcy courts are the “pros from Dover” in situations of financial distress. Not just the judges, but the lawyers and accountants, too. They are good at resolving these messes.

Every financially distressed situation has four phases: 1) Denial — “I don’t have a problem”; 2) Shoot the messenger — “Don’t believe those guys, I’m actually fine,” or, “I have a plan”; 3) Anger — “If they would leave me alone this would all go away;” and 4) Acceptance — “This is a mess, my mess, everybody now knows it, and now it needs to be solved.” (San Diego is probably somewhere between phases two and three.)

Bankruptcy judges and professionals hear this stuff all the time and buy none of it. They start at phase four. No political spinning, no bleeding, just smart folks who find solutions to these problems.

The Orange County bankruptcy judge (who actually lives in San Diego County) moved that case quickly and brilliantly (though he ruled against me on several occasions — I’m certain he regrets it). The OC was an infinitely larger and more complex situation than San Diego. But we had: full financial disclosure from all county departments (no departments claiming “independent nation” status — documents tend to be produced when a federal judge orders them produced); fully scrubbed, comprehensive and audited new financial statements that you could understand; and a confirmed plan in less than two years. We issued bonds on Wall Street during the bankruptcy proceedings, and the county had an “AAA” bond rating within a year of coming out of bankruptcy. This is how adults deal with serious financial problems.

There are other considerations.

Bankruptcy judges do not take over management of the city. All municipal decisions stay with the mayor and council. The court just deals with the financial mess.

Bankruptcy plans bind “classes” of claims. So you do not have to get everybody’s approval in order to fix the rights of entire classes.

No city assets need be sold or have liens placed against them to get out of municipal bankruptcy. So you do not lose your beaches or parks.

No taxes need be increased to satisfy the monster debt.

The legal issues regarding whether the monster debt is even legal in the first place are decided by judges uniquely experienced in that very type of issue and not unwilling to make the hard decisions.

On confirmation of a plan, the investment banking world is banging at your door to do business. They actually like that you have addressed all the problems at once, rather than addressing them incrementally.

Municipal credit ratings recover instantly. Why? Because your financials are real. And your unfunded debt is gone.

All parties are bound by the plan, so there are no holdouts to private negotiations. If they do not show up at the table, they are on the menu. Everybody shows up.

It’s good for unions. They get real financials, and agreements covered by federal court orders. The day after confirmation of a plan, unions can get back to real bargaining with a solvent city instead of being gamed forever by a city that will always be in financial crisis.

So, why would San Diego not consider this option?

There may be fear of the process. There may be interests that do not want to fully resolve the crisis. Political careers may be jeopardized by a bankruptcy filing (though the pols in OC who really embraced the process to solve the county’s problems came out ok).

Even though we would get a full audit, restored credit ratings, renewed Wall Street credit and financing to deal with sewer and water projects (not to mention the Chargers?) sooner, San Diego will likely not file a Chapter 9 unless we can call it something else. For odd reasons, this is how it is in San Diego. But, it might be some real help to us, if only it were known as “a generous adjustment.”

Shea, a San Diego attorney, was appointed by a federal court to represent the cities, school districts and special districts that had deposited more than $5.2 billion in the failed Orange County Investment Pool, the largest municipal bankruptcy in American history. He is married to San Diego City Retirement Board member Diann Shipione, and served on the transition team of City Attorney Mike Aguirre.

1 Comment

  1. Pension crisis

    I do not think that any elected officials have a viable solution to the pension deficit issue which will continue to grow.

    As I said before there is no simple solution. This is an issue that affects every level of government (City, County, State, Federal, Etc.). No one solution or one individual can solve this problem. It would take a committee with multitude of financial planners and an open mind to modify the plan as it progresses, when some facets of the plan do not work as anticipated.

    But as the crisis grows, we as people of this great country must put our differences aside and work for the common goals and restore our City, State and the Nation to the spirit of our founding fathers.

    I think that every politician or candidate should state what they propose to do to correct the situation and not attack their opponent or the opposition.

    Tell me and or show me what you can do, not what the other did not do or did wrong.

    Action speaks louder than words.

    We need to remain vigilant, especially as the City of Los Angeles is facing a monumental fiscal crisis.

    Public confidence in the integrity of the Government is indispensable to faith in democracy; and when we lose faith in the system, we have lost faith in everything we fight and spend for.

    Thank you

    YJ Draiman for Mayor of LA

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