Wednesday, March 23, 2011

Just the facts, m'am

Facts we already know:
  • San Diego has a multi-billion-dollar debt, accumulated through years of “creative” pension practices like underfunding and retroactive payouts. Think of it as a 30-year mortgage with double-digit interest rates and a principle that grows instead of shrinks. Despite increased payments we keep falling behind. It's a structural deficit.
  • We've also got an annual budget deficit.  Think of it as the unpaid amount on a credit card statement for a year’s worth of city services.  
  • Payments into our structural deficit bite off bigger and bigger chunks of our city's revenues, making it impossible for the Mayor and City Council to pay off our annual “credit card” to balance the budget.  So we resort to drastic cut and slash options -- last year, this year, next year, and for decades to come.
  • It's a touchy secret: the city has exceeded its ability to pay down our huge debt while also keeping the city running at an acceptable level.
Birds do it…bees do it…let’s do it…let's throw caution to the winds and indulge in a lightweight Q&A on the facts of life about municipal bankruptcy:

1) Ugh, bankruptcy...who would do such a thing? A city in obvious financial distress-- ours, for example.  Filing under Chapter 9 of the federal Bankruptcy Code would provide San Diego with a time-out to develop and negotiate a plan for adjusting (reorganizing) our city’s debilitating debt, while protecting us from lawsuits and related actions.
2) Who makes the first move?  It’s a voluntary act, so the City Council could pass a resolution (with, one would hope, the Mayor’s blessings) acknowledging our city’s insolvency and intention to file a petition for bankruptcy protection.
3) Who else gets in on the act?  The city’s petition goes to the chief judge of the 9th circuit appeals court, who then appoints a federal bankruptcy judge to take on the case. The point of doing it this way is to get an experienced, qualified, and politically-independent judge to handle the proceedings.  Plus high quality, problem-solving bankruptcy lawyers and accountants to work on behalf of the city.
4) Can the bankruptcy court have its way with us?  No, the rules are strict: Help clear up our financial mess but hands-off our private business!  The bankruptcy judge:

* cannot interfere with the city’s day-to-day operations
* cannot take over the political powers of the Council or Mayor
* cannot order the city to sell city property or assets
* cannot interfere with city revenues or governmental affairs
* cannot appoint a receiver or trustee to take over city business
* cannot control the city’s spending decisions or force new taxes
* cannot tell the city whom to hire as experts or consultants

  5) Bankruptcy costs big money, right?  Yes, in the short run. This quick, responsible, and effective legal process to reduce the massive debt that incapacitates our city is expensive.
          No, in the long run. We would soon stop flushing wasted millions down the city's broken, running toilets.
6) Then who does what?  Everything gets put on the table – including open disclosure of the city’s financial data. (This would force the hand of city officials, still withholding full financial disclosure in our overdue city audit – a troubling throwback to the bad old days of fraudulent financial cover-ups in City Hall.)
Everyone – including impacted stakeholders like banks, bondholders, creditors, public employees, residents -- has a place at the table to address disputes and find a comprehensive solution.
7) Who writes the recovery plan?  It’s the city’s responsibility to negotiate and file a recovery plan (with the help of financial advisors and bond counsel) for adjusting the city’s debt.  The plan is delivered to the bankruptcy judge, who responds to dissenting challenges and has the last word on confirming – if the job is done right -- an optimal financial recovery plan for the city of San Diego.
          To allay fears of disrupting city access to the public market, the city has the power to affirm its obligations to bondholders and designated others.
8) Who wants you to think that Chapter 9 bankruptcy is a dirty word?  Believe it or not, there are influential people in San Diego who make out like bandits despite (due to?) the city’s chaotic responses to its financial distress.  Name a few, you say?  This won’t make me any new friends but here goes:

* Upper echelon politicians who draw or look forward to generous pensions
* High-stakes investment advisors, hedge fund operators, banks, lawyers
* Other interests also luxuriating in vast pools of pension funds
* Panicked politicians worried about their future careers
* Ambitious politicians manipulating fiscal chaos to advance their agendas
* City officials adept at tapping into slush funds to balance budgets
* Short-sighted people refusing to give up anything – the future be damned.

Once more for the road: Municipal bankruptcy is a way for cities to reorganize their over-the-top debt.  It’s a respectable option we can pursue to restore San Diego’s fiscal health.  It merits frank discussion and evaluation so we can decide whether reorganization of our debt via Chapter 9 municipal bankruptcy is in the city’s best interest
Let's see how far we get once we start talking dirty.