Its Ego Bruised, San Diego Asks: ‘What Next?’

One local television station this week banned use of San Diego’s longtime slogan -- “America’s Finest City” -- until further notice, deeming it too “arrogant and cynical” for a municipality in the throes of national humiliation.

The local paper raised the editorial question Thursday: “Can San Diego sink any lower in the eyes of the world?”

And a neighborhood meeting to discuss the city’s budget woes turned into a finger-pointing festival Wednesday night as angry residents demanded to know how City Hall could have come to this: The mayor resigning, the deputy mayor facing trial for a scandal called “strippergate,” a pension fund nearly $2 billion in the red and the city’s credit rating virtually subterranean.

“San Diego’s reputation has been tarnished. There’s no question about that.... But I ask you to remember we live in a wonderful city,” Councilman Jim Madaffer said Wednesday night as he struggled to stay true to the city’s spirit of boosterism, a characteristic ingrained in its civic DNA. “The sky is not falling. Our hair is not on fire. We will get through these issues.”

As the second-largest city in California -- and No. 7 nationally -- struggles through its latest crisis, it is engaging in a very public bout of soul-searching. At a town hall meeting convened to discuss the lack of command at City Hall, prospective leaders pondered just who could save San Diego. Maybe someone “with backbone.” Maybe someone who can “play well with others.” Maybe no one at all.

“All of this happened when we had a mayor, maybe we need a few months without one,” said Councilwoman Donna Frye, the co-owner of a surf shop whose write-in insurgency in last year’s mayoral race was thwarted by a judge’s ruling. “I’m not joking.”

But there is a gap between what San Diego needs, said banker Peter Q. Davis, a two-time loser in mayoral primaries, and what it will accept as it works to solve its problems. “This town traditionally punishes risk-takers and punishes new ideas,” he said.

It also has routinely gotten into trouble, falling into one crisis after another. Some blame San Diego’s history of “cheap provincialism,” its desire to get by with as little taxation as possible, for many of its problems, including the current pension shortfall.

“Since Proposition 13, San Diego has thought there was a free lunch and threatened any politician who talked about raising revenue,” said Mike Stepner, a city planner turned architecture professor. “We’ve been robbing piggybanks and now it’s caught up to us.”

Councilman Scott Peters said: “San Diego is like a child of the Depression -- cheap, scared and risk-averse.”

Always on the prowl for ways to please their constituents without raising taxes, San Diego officials in the 1990s thought they had found the ideal plan.

The stock market was booming. Investment returns on the pension plan were sufficient to keep it solvent. When annual returns exceeded expectations, the city decided not to plow the windfall back into the fund and instead struck a deal with employees.

Part of the windfall would give retirees an extra pension check each year and part would help keep city services -- parks, police and street repairs -- at a reasonable level. Everyone would be a winner, agreed city officials, labor leaders and the City Council. Naysayers were overridden.

But when the market dropped, the council was stuck. Substituting city funds for investment returns would have meant cutting services and angering residents. Instead, the council opted to under-fund the system in hopes that the market would rebound.

San Diego’s troubles were compounded when the city failed to promptly disclose the growing deficit to Wall Street during a bond issue. That caused the Securities and Exchange Commission to begin investigating whether sanitized disclosure statements were violations of securities regulations.

Credit rating agencies lowered the city’s ranking. The U.S. attorney’s office began sniffing for conflicts of interest among employees and union leaders involved in devising the benefit increases.

One strategy to whittle away the deficit involved floating pension bonds, the first in the city’s history. But in October, an auditing agency hired by the city announced that it would not certify its audit until all questions about possible problems were answered.

As a result, the city cannot sell bonds and is akin to a person with money in the bank but an ATM card that doesn’t work. Officials are so frustrated with the auditing firm, KPMG, that there is talk of firing the auditors and bringing in another firm. As the crisis deepened, Mayor Dick Murphy announced his resignation Monday to allow the city “a fresh start.”

Add to the mix a newly elected city attorney. Michael Aguirre, long a City Hall critic, immediately began multiple investigations and accused the mayor and City Council of violating securities laws. Aguirre called for the mayor and city manager to resign amid intense bickering.

“It’s hard to understand how it could have spun out of control so quickly,” said George Loveland, who retired this week after 38 years in various management positions with the city. “I never thought it would get this bad.”

But it is hardly the first problem in modern San Diego history.

The city “has had more than its fair share of major political scandals,” said California historian Kevin Starr. “It becomes legitimate to ask the question why. Is there an instability in the city? ... On a deeper level, there’s this ambivalence to urbanism that keeps people from paying attention to civic culture.”

In 1970, Mayor Frank Curran and most of the 1967 City Council were indicted on charges of taking bribes to grant Yellow Cab a huge fare increase despite being warned off by an outside consultant.

Yellow Cab was owned by financier C. Arnholt Smith -- friend of President Nixon and also owner of the U.S. National Bank of San Diego, the Padres baseball team and the posh Westgate Hotel.

The Internal Revenue Service and the SEC investigated Smith and found that the onetime Mr. San Diego of the Century had used $345 million of his bank’s capital to enrich his own companies. The IRS slapped him with a lien of $22.8 million. U.S. National failed.

Although the case against Curran and the City Council later fell apart, the downfall of Smith and the mayor together brought some of the most fundamental changes in modern San Diego politics, weakening business dominance and ushering in a young reformer named Pete Wilson, who became mayor in 1971.

But Wilson left for the U.S. Senate in 1983, early in a decade that brought San Diego J. David Dominelli, whose investment operation -- J. David and Co. -- was found to be a Ponzi scheme. Mayor Roger Hedgecock was indicted along with Dominelli and others on charges of laundering money during Hedgecock’s 1983 campaign.

After two trials -- in the second of which he was defended by mob lawyer Oscar Goodman, now mayor of Las Vegas -- Hedgecock was convicted on 13 felony counts and resigned from office. Today he is a popular radio talk show host.

The dominating controversy in the 1990s surrounded public subsidies for professional sports -- the Padres and the Chargers. Mayor Susan Golding was excoriated for agreeing that the sports stadium should be expanded and that the city would pay the Chargers for unsold tickets in a deal that later cost taxpayers $20 million.

Several years earlier, when Golding was a county supervisor, her then-husband, Richard Silberman, was caught in an FBI sting in which he agreed to go into business with what he thought were drug kingpins. He was later convicted and jailed. The couple divorced.

Deputy Mayor Michael Zucchet and Councilman Ralph Inzunza face trial next week on charges of taking illegal campaign contributions from the owner of a strip club.

Some blame the city’s problems on a deep municipal inferiority complex. Even though it’s the second-biggest city in California, San Diego has long been overshadowed by sprawling Los Angeles and petite San Francisco.

“Los Angeles, San Francisco, the Silicon Valley and Orange County are all more important in the political, social and economic structure of the state than San Diego,” said George Mitrovich, president of the City Club of San Diego. “It’s always been that way. It’s not going to change. Would it ever occur to Los Angeles, Boston, Chicago or New York to call itself ‘America’s Finest City’? It’s ridiculous.”

The spirit of optimism remains strong. One of the biggest questions facing San Diego is how much impact this latest crisis will have. So far, the city remains robust, with its three main industries -- manufacturing, military and tourism -- unaffected.

“The pension is a short-term distraction but long-term, San Diego will be fine,” said Scott Barnett, former head of the local taxpayers association. “The growth here has been stupendous just in the last year.”

The city is on the short list for the state’s stem-cell research center. To most of the world, the faces of San Diego are SeaWorld’s Shamu and the pandas at the San Diego Zoo, not Dick Murphy and Donna Frye. No one is predicting that tourists will avoid San Diego because of political turmoil. “Most people don’t know, or care, who is leading municipal government when they choose their vacation destinations,” said Sal Giametta, vice president of the San Diego Convention and Visitors Bureau.

The main victims of the current crisis are likely to be residents who depend on city services. Officials are figuring out an austere budget for 2006 to help San Diego dig out of its fiscal difficulties. The City Council is weighing whether to replace Murphy by appointment or a special election.

Many observers suggest that an election, rather than an appointment, would make everyone from local voters to Wall Street far happier.

“We haven’t had a good riot for a time,” said San Diego Mesa College political science professor Carl Luna. “If the council names the mayor, we may have one.”

Former Gov. Gray Davis said that “the next mayor has to have the legitimacy of an election behind him or her to give San Diego a fresh start.” And he has sympathy for the much-maligned Murphy.

“It’s always fun to be an executive in good economic times,” said Davis, who should know. “It’s a lot different in bad economic times.”