San Diego Snarled in Web of Financial Woes

With City's Reputation Sullied and Its Deficit Growing, Mayoral Race Heats Up

By Kimberly Edds
Special to The Washington Post

SAN DIEGO -- The Web site boasts of the city being "the most efficiently run big city in California." Its commitment to fiscal conservatism has been the envy of municipalities everywhere. But San Diego leaders are now finding themselves staring at a deficit of more than $2 billion, largely of their own creation.

The pension fund has a shortfall of more than $1.15 billion and growing. An additional $1 billion in unfunded retiree health care costs pushes the figure past $2 billion.

Because they deliberately underfunded the pension fund, city leaders have pushed California's second-largest city so far into the red that pension payments could drain city coffers and threaten its fiscal health for years.

"People are somewhat in shock the city ended up in this position. People always said with pride that we live in paradise. Now we're a city in crisis," said Mitch Mitchell, vice president of public policy and communications for the San Diego Regional Chamber of Commerce. "We're in a 'save the city' mentality."

Possible stopgaps include heavy borrowing, downsizing the payroll and privatizing some services while slashing others. Bankruptcy, which could allow the city to repeal pension benefits, has been mentioned. But a draft report by a city pension reform committee questions whether San Diego, once renowned for its fiscal prudence, will be able to solve its problems.

"The city has been borrowing against the future. With interest on that borrowing compounded every year, the city's ability to ever repay is a serious question which must be addressed," a draft report by the pension committee stated.

Moody's Investor Service now rates the city's general obligation bonds at Aa3 -- the same level as San Francisco and one level below Los Angeles. Depending on the outcome of a federal criminal investigation and the 2003 fiscal audit, another bond-rating reduction is possible.

Investigators from the FBI, the U.S. attorney's office and the Securities and Exchange Commission are probing whether charges should be brought for the suspected filing of incomplete financial documents before the sale of bonds. The federal investigation, along with credit-rating downgrades from Wall Street, is preventing the city from issuing bonds to raise revenue.

"This is the worst fiscal crisis this city has faced in its history," said Carl DeMaio, president of the San Diego-based Performance Institute, which has been studying the city's budgeting process. "It's an embarrassment."

Residents are feeling the pinch, and they are asking why. It costs more to swim in the city's pools; some public libraries are cutting hours; potholes are virtually ignored; Christmas in the city was temporarily canceled when lack of funds forced organizers to call off a popular holiday celebration featuring free admission to museums and cultural exhibits.

"It's ridiculous," said Harold Perdew, a retired engineer who moved to San Diego from Texas six years ago. "It's crazy. They're paying these people all of these millions of dollars, spending all this money on retirement. For what?"

The pension situation and the reduction in city services have become topics of heated debate in the nonpartisan mayoral election in November. Mayor Dick Murphy is fighting for his political life against his challenger, San Diego County Supervisor Ron Roberts. Roberts, who lost the mayor's office to Murphy four years ago, has accused Murphy and the City Council of poor leadership and of trying to hide the grim financial outlook from residents.

"At best it's bleak, and at worst we don't know," Roberts said. "You've got a city that has put itself in a very, very deep hole and refuses to stop digging. The city has continued to cover up and hide the true state of affairs."

At Bucky's of Boston ice cream shop, owner Randy Moretti said he is tired of watching city leaders waste dollars, increasing benefits for workers while tacking on fees for residents and business owners to balance the budget. He wonders if it is worth staying here.

"There's plenty of money. They just don't direct it in the right way," said Moretti, 52. "We live in a desert. Why do we have street medians with grass while we're overburdened and overtaxed? I don't have any benefits. If I get sick, I have to work. If I don't work, I don't get anything."

Uneasy about the direction the city was taking, the board of directors of the Chamber of Commerce started to brainstorm for new revenue sources. Support for Murphy has begun to waver as the business community questions whether he can maneuver through the fiscal firestorm.

Murphy denied the city is facing bankruptcy and accused critics of blowing the financial problems out of proportion.

"We just passed a balanced budget without raising taxes, we are meeting our financial obligations, and we have a plan in place to deal with the unfunded liability of the pension system," Murphy said. "There is no question that in retrospect the city made a bad decision to underfund the pension plan. But we are addressing the issue, we have taken action and we are doing things to fix it."

In a draft of its final report, the pension committee concluded San Diego is caught in a "perfect storm." Several factors collided to thrust the city into financial crisis.

Riding high with the stock market boom, city leaders increased benefits for workers, allowing employees to retire earlier with more money. At the same time, they reduced the amount the city pays to the pension fund, which consists of interest from investments and city contributions. For years the system was funded at 100 percent; now it is at 67 percent.

When the market dropped, the city ended up with less money and bigger bills. Other California cities were hit hard, but everyone expected San Diego to be prepared.

"It was a combination of factors that all came together at the same time. This was not a result of a downturn in the market," said April Boling, a certified public accountant who heads the pension committee.

Conflicting advice prompted city leaders to improve pension benefits without them fully understanding how much the increased benefits would cost, Boling said.

The city manager and the city auditor retired under fire as the financial picture deteriorated. The pension board has sued its counsel, accusing the firm of providing inadequate advice. Retirees worried that they won't get their pensions have sued the city.

The average pension has doubled over the last decade. The sweetening of benefits included a deferred retirement option plan, which lets an employee delay retirement and create a special account earning 8 percent interest and a 2 percent annual cost-of-living adjustment in their pension. High-paid employees could receive nearly $1 million on retirement under the plan.

The pension reform panel is recommending a rollback of the 2002 benefit increases for all new hires, but that could be tough for the mayor and City Council members. The powerful public employee unions have resisted any reduction in the benefits, and every council member enjoys union support.

"It's going to be a very interesting next 60 days, especially if you like knock-down, drag-out politics," Mitchell said.