Eroding confidence

Wall Street warns of trouble in San Diego

Moody's Investors Service, the respected international credit agency, has taken an uncharacteristically detailed look at San Diego's municipal finances. Its findings portray an uncharacteristically grim picture of the city's deteriorating condition.

More ominous, the Moody's assessment hints darkly that the situation may get even worse.

The uncertainty stems principally from two pending probes of the city's financial reporting practices, one by the Securities and Exchange Commission and another by the U.S. Attorney's Office here. If these federal investigations uncover criminal wrongdoing, far more grievous trouble for taxpayers lies ahead.

Also contributing significantly to Wall Street's unease is a long-delayed independent audit of the city's books. This examination should have been completed more than six months ago. In its report, Moody's cited the worrisome hold-up in completing the fiscal year 2003 audit as a factor in its decision to downgrade San Diego's bond rating by two notches. If the audit detects additional financial irregularities, on top of those already disclosed in fiscal year 2002, the city's problems will be severely compounded.

As it is, San Diego is unable to borrow at favorable rates in the municipal bond market because of lingering questions about its accounting practices. Even if the audit ultimately gives the city an unqualified OK, and even if the federal probes are concluded without charges being filed – two very big unknowns – taxpayers still will face millions of dollars in higher borrowing costs due to the multiple downgrades in the city's credit rating.

Mayor Dick Murphy, City Manager Lamont Ewell and other officials cite the modest steps they have taken to stanch the fiscal bleeding, such as boosting payments to the deliberately underfunded pension system. But Wall Street analysts are unimpressed.

"New concerns have arisen about the city's ability to manage its financial position," write Moody's analysts. "While our confidence in the city's financial management has eroded, we note that staff is taking steps toward addressing these challenges."

The report cites major structural flaws in the budget in spite of a strong local economy. In short, the fiscal shortcomings are self-inflicted – due not to sagging tax receipts but rather to the city's refusal to exert "control over its expenditure levels sufficient to generate strong reserves and a stable, structurally balanced budget," according to Moody's. The document adds: "A structurally balanced budget is a hallmark of the highest rated cities nationwide; (San Diego's) policy-makers do not appear to have made this a priority."

Unquestionably the biggest structural flaw in the city's budget is a runaway pension plan that is depleting an ever-larger chunk of the general fund, which is supposed to pay for police and fire protection, street paving, garbage collection, park maintenance and most other services. Until Mayor Murphy and the City Council take fundamental steps to rein in pension costs, Wall Street is likely to continue to paint a grim picture of the city's finances.