City’s Woes Carry Into 2005

To a degree unthinkable just a year ago, San Diego enters the new year with its financial future in the grip of outside agencies and the city’s much-praised “quality of life” imperiled by a fiscal debacle.

As 2004 dawned, the city appeared to be sailing smoothly, with taxes low, services at a reasonable level and City Hall mostly tranquil, except for a continuing controversy about the San Diego Chargers’ contract.

Now the city is being investigated by the U.S. attorney’s office and the Securities and Exchange Commission; the City Council and new city attorney are bickering; officials are hiring lawyers and receiving subpoenas; and the city manager’s office is planning budget cuts.

On Wednesday, City Atty. Michael Aguirre released information showing that a dozen present and former high-level city officials have been served with subpoenas by the U.S. attorney’s office seeking documents and testimony.

Prosecutors are trying to determine whether conflicts of interest were at play in the way the city decided to raise pension benefits and pay for them.

“If you told me a year ago this would be happening, I would have said you were too negative, way off base,” said City Manager Lamont Ewell. “Now I’m just waiting for the plague of locusts.”

“Every time I think the city is out of shoes, another one drops,” said Carl DiMaio, director of the Performance Institute, a Libertarian think tank.

The biggest issue was a decision in the 1990s to generously increase pension and health benefits for retirees, relying on a rising stock market to pay the tab.

When the market slumped after the dot-com bubble burst, the City Council opted against increasing pension fund payments from the general fund, which would have meant cutting services, such as park and beach maintenance, pothole filling and public safety.

A deficit, city officials knew, was bad. Not admitting the problem to Wall Street was even worse.

A whistle-blower on the city’s pension board accused the city of hiding the news from Wall Street while floating hundreds of millions of dollars in bonds. Last January, the city voluntarily amended its financial statements to bond underwriters.

Following that move, credit agencies dropped the city’s credit rating, although it remains in the middle of the pack among U.S. cities. The SEC began a civil investigation into whether disclosure regulations had been broken, and the U.S. attorney opened a criminal probe for possible conflicts of interest.

The subpoenas issued by both the SEC and U.S. attorney suggest the two parallel investigations are in their early stages, city officials say, and the controversy is expected to linger well into the new year.

To try to win favor with Wall Street, the city hired an outside auditing agency, KPMG, to review the city’s books. Officials hoped the firm would declare that the pension deficit was an aberration, not a symptom of a budget system that hides red ink and omits unpleasant facts.

But KPMG, after working for months, told the city this fall that it will not issue its audit until the city conducts an investigation for other problems that might be lurking.

Ewell hopes to satisfy the firm by late February so that the city can return to Wall Street and sell bonds for water and sewer projects. In the meantime, he’s drawing up a list of $6 million in cuts to be announced soon.

“We’re chasing phantoms, new allegations every day,” said Ewell, who was promoted to the top job when his predecessor was pushed out by the City Council because of the SEC disclosure controversy.

So far, the public seems unconcerned.

A poll done for the local Public Broadcasting System station showed widespread contentment among the citizenry. A City Council meeting to discuss the pension problem drew only a handful of spectators.

But city officials admit that San Diego’s reputation as a well-managed city has suffered. Like a besieged city hauling down its flag, the city’s website no longer touts San Diego as the best-managed city government in America.

Instead, the city calls itself America’s Finest City, a morale-boosting motto created in the 1970s after the Republican party withdrew its national convention from San Diego at the last moment.

“You have the seventh largest city in the country in the eye of a storm,” said Mitch Mitchell, vice president of the San Diego Regional Chamber of Commerce. “We have no other option but to address it and address it quickly.”

Fixing the pension problem may mean confrontation with the city’s increasingly powerful labor union movement. Every member of the council won election with support of at least one labor union.

Jerry Butkiewicz, secretary of the San Diego-Imperial Counties Labor Council, warns that city employees will not passively allow officials to fix the pension problem by stripping away hard-earned benefits.

“It is very easy to dig themselves out of the pension problem,” said Butkiewicz, by cutting management salaries and what he calls subsidies for “influential business interests” such as sports teams and land developers.

While San Diego is not alone among cities and counties facing a deficit in its pension program, its problems are exacerbated by its historic antipathy toward taxes and fees.

Steve Erie, political science professor at UC San Diego, said the city’s problem is that, unlike other cities, it has never expanded its tax base by utilizing such things as utility surcharges that could be tapped as a bailout fund.

“We’ve historically underfunded public services; we’re cheap,” said Erie. “The margin of [budget] error is smaller here than other places.”

Without the KPMG audit, the city cannot issue pension bonds to raise funds. “It’s a bank account we cannot access,” Erie said.

Mayor Dick Murphy insists the pension problem, while a major issue, is being overstated and that the city’s long-term fiscal outlook is sound, with rising business investment, sales tax revenue up by 10% in the last year and a redeveloped downtown that is a model for urban America.

“The issue was made worse because this is a political year and [county Supervisor] Ron Roberts’ entire campaign was based on criticizing me and the council for not fixing the pension problem,” Murphy said.

Murphy has called for a wage freeze, a rollback of certain benefits and a strict schedule of city payments to reduce the deficit.

But Murphy’s own tenure at City Hall could be in doubt. An unofficial examination of ballots showed that Councilwoman Donna Frye, a write-in candidate and the lone vote against the pension under-funding, got more votes on election day than Murphy or Roberts.

But 5,500 of those who voted for Frye did not darken the oval next to Frye’s name, as required by state law, and the votes were not counted. A lawsuit by Frye supporters to force the county registrar of voters to count the votes for Frye in the final tally is being prepared.

DiMaio, of the Performance Institute, said San Diego’s dilemma should be a wake-up call to cities across the country.

“Leaders have to be on the watch,” he said.

To negotiate with the SEC, the city has hired Washington lawyers who are former SEC investigators.

The council has also adopted what analysts are calling the most stringent disclosure regulations of any municipality in the nation, akin to the federal regulations imposed on private industry after the scandals at Enron and other companies.

But while city officials, like the mayor, prefer to discuss the future, much of the discussion in 2005 will be of the past and how the city got into its current situation.

Add the fact that two City Council members -- Michael Zucchet and Ralph Inzunza -- face charges filed in 2003 of taking bribes from a strip club, and the mood at City Hall is one of weariness.

“We’ve got to move on from all of this,” said Councilwoman Toni Atkins.