Pocket Change: City Bankruptcy?

During the 2005 San Diego Mayoral race there was serious talk about the city declaring bankruptcy as the best way to get out of its fiscal hole. While politicians have shied away from even mentioning the idea since then, talk of bankruptcy is still alive in San Diego.

Last week, The San Diego County Taxpayers Association held a Municipal Bankruptcy Forum focusing on the controversial topic and answering questions from community leaders who attended. (See SDNN’s Taxpayer advocates host panel on Chapter 9 bankruptcy for detailed information from the forum’s experts). And, although panelists didn’t recommend Chapter 9 for any county cities – it remains a hot topic among local leaders.

Some of the key questions included: “Can a city erase promised pension benefits or pay raises through bankruptcy?” and “What are the costs of going bankrupt?”

At this moment, the pension deficit has ballooned to $2 billion and the general fund deficit is hovering between $179 million and $200 million.

Related links: Is bankruptcy an option for San Diego? | More Pocket Change

Additionally, Mayor Jerry Sanders told the city that it faces a $67 million drop in sales and property tax revenues in the coming fiscal year.

The Mayor’s five-year financial outlook estimates deficits in excess of $100 million every year through 2015.

With these kinds of negative numbers, it would be nice to simply reset the budget. Declaring bankruptcy would potentially allow San Diego to renegotiate contracts with labor unions and the amount invested in the pension system.

This may be possible. Former mayoral candidate and business leader Pat Shea said in the past that bankruptcy allows municipalities to have a clean slate.

But, this can be easier said than done. Bankruptcy would force a solution to be hammered out, but it could take a lot of costly litigation.

Additionally, Sanders’ spokesperson Rachel Laing said the city does not believe it even qualifies for bankruptcy as the city must prove it’s insolvent. At the current moment, because the city pays its bills it remains solvent — but that it just one of five main requirements for municipalities to qualify for bankruptcy.

What are the requirements for a city to be considered insolvent? According to a past interview with Shea, a city is considered insolvent if it can no longer deliver a basic level of services and fulfill the fundamental needs of the residents.

This ambiguous conclusion at least draws a line between cutting city services and considering bankruptcy as an option. When the grass in city parks is dying, children can’t go to the local public pool or finish a school report at a library because of closures, we’ll know its time to seriously contemplate bankruptcy.

But, for now, city officials aren’t publicly considering it.

The Pocket Change regular commentators give their take on the issue:

Murtaza Baxamusa, Ph.D., AICP, director of Research and Policy, Center on Policy Initiatives:

The talk about the city going into bankruptcy to solve its budget woes is as flippant as talk about a family going to Las Vegas, so they can pay off their grocery bills. With a revenue stream of more than $1 billion annually, a pooled investment portfolio of $2 billion, and a tax-base with healthy GDP of over $50,000 per capita and rising, San Diego has few excuses.

The painful cuts to city services over the past three years would be akin a family starving itself to save dollars and cents, so that someone can go to Vegas to gamble it off.

The evidence from Orange County bankruptcy shows that low revenues and high services were the key ingredients cooking in the bankruptcy cauldron. When the magic of risky investments failed to levitate the investment pool, Orange County took a rare and unique step to be the first major municipality in the U.S. to go to bankrupt.

What followed was one of the worst municipal failures in the past century, with threats of a state takeover, investor bailouts driving the city’s notes to junk status, and the cities being severely shortchanged. Funds from public infrastructure projects like road repair, harbors, beaches and parks were diverted to pay bankruptcy-related debts. Orange County could not build new parks or facilities, nor maintain exiting ones.

Orange County residents had to pay a bankruptcy premium in everyday services such as charges for library books, parking fees or trash disposal at the landfill. Due to the large number of layoffs, and cuts to economic development and social service programs, the economic situation for working families and businesses grew worst.

After almost two years, Orange County emerged significantly wounded in its ability to raise revenues from taxpayers, or investments from the markets — an infliction that would handicap its ability to serve its citizens efficiently and effectively for over a decade.

Fifteen years later, the cost of the Vegas trip by the Orange County Supervisors has not been tallied. And yet, the distant lights of instant fortune continue to tempt those who would rather not do the hard work of bringing home the funds to make ends meet.

Erik Bruvold, founding president of the National University System Institute for Policy Research:

Given the magnitude of the challenge facing San Diego’s budget engineers, it is no wonder that talk of municipal bankruptcy is once again heating up. There is simply no way that one can cut $60 million from the FY 2010 and $120 million from the FY 2011 general fund budgets without reducing service levels in dramatic ways. Moreover, as the forecast did not include certain liabilities, it is probable that even after these cuts are made, the City’s balance sheet will remain troubled.

People are once again contemplating a bankruptcy reorganization as something akin to a “get out jail free” card – a process to reorganize the City’s liabilities in a way that improves its long term outlook.

Caution is in order. The key question that will be debated and litigated, to the tune of millions of dollars, is whether San Diego has done enough to cut costs and restructure its finances. Those arguing for bankruptcy will confront some serious challenges including:

A FY 2010 budget that includes nearly $8 million to support arts organizations, street fairs and festivals.

That during the past five years,  less than a score of City employees have been involuntarily terminated.

That the city has foregone ways of raising revenues that courts have deemed legal, such as “charging” enterprise funds for use of the public right-of-way (roads and highways).

Add to the ledger the city’s desire to move forward on taking on the new liabilities of rebuilding City Hall, expanding the Convention Center, and replacing the city’s Central Library. It will be hard to show that these are the actions of a petitioner who really felt they were at the brink of insolvency.

San Diego is in, to be blunt, a miserable position. Its long term fiscal health is not good, but in the short term, it can muddle along. It is likely that the piper will not have to be paid in full until pension and retiree health care payments balloon. Until there is a consensus to confront the long-term realities of the city’s balance sheet, it is improbable that a bankruptcy petition is going to be filed.

This story has been revised. Steven Bartholow is SDNN’s multimedia editor and political reporter.

Tags: bankruptcy, budget, crisis, deficit, gambling, income, insolvent, municipal, pension, revenue, SDNN, Uncategorized, vegas

This entry was posted on Monday, October 26th, 2009 at 7:13 pm and is filed under Pocket Change . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.