Another City Considers Bankruptcy

San Diego May Use Bankruptcy to Roll Back Benefits: 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.

Comments:

Again we see another municipality struggling with a high debt load and unfunded obligations to employees.

Those making comments (in italics) about saying how difficult it is to make an insolvency case for San Diego need a remedial course in arithmetic.

$3.5 billion in unfunded liabilities alone is enough to cause severe financial stress in a city with 1.3 million inhabitants and about 500,000 households.

Q: How can the city raise taxes enough to cover these unfunded liabilities?

A: They can't. In an environment where property values and incomes are declining, large tax increases will not generate enough revenue cover large shortfalls.

The only way out is to default.