The City of San Diego's financial system needs to go on Viagra and stay on it. The Department of Finance is drawing a disturbing distinction between "hard debt" and "soft debt." Several experts worry that the City is going back to the dysfunctional days of yore. The City should consider all of its debt obligations as, essentially, hard debt -- something that has to be paid, no matter what. Thinking otherwise got the City in the big trouble it's now in.
The words "hard debt" describe a borrowing arrangement in which a fixed amount of money is owed bondholders at a stated interest rate and on prearranged payment terms. The borrower is likely to put up collateral or security. So-called soft debt is more flexible, or lenient, some would say. While hard debt is a firm obligation, soft debt is paid when cash flow permits. In the case of San Diego, hard debt is owed to bondholders and soft debt is owed to pensioners.
The subject came up on July 25 at a meeting of the City's Budget and Finance Committee. An official of the Department of Finance gave a PowerPoint presentation on the City's debt management. There was nothing about the money that the City owes the pension system. "What I was hearing through their presentation was that they did not consider pension and retiree health debt as part of debt management," says Councilmember Donna Frye.
She asked why such debt was excluded and was told that the pension debt was soft debt. Frye pointed out that every year the City has to make payments to retirees, and under Governmental Accounting Standards Board rules, this has to be shown as debt. "I was amazed that we had a debt management policy that ignored over $2 billion of debt," she recalls.
In June, the Department of Finance distributed an 84-page document, titled "City of San Diego Debt Policy," explaining various kinds of debt -- general obligation bonds, lease revenue bonds, tax allocation bonds, etc. There was nothing about the pension debt. After all, it's supposedly "soft."
It was this kind of thinking that led to the City's plundering the pension fund in the late 1990s and early 2000s, then promising even bigger future payments to appease the workers. Result: an enormous deficit. The City says it has $2.2 billion of pension/health-care obligations, and unlike in past years, that liability will be revealed in any informational documents published for potential bondholders when San Diego finally returns to the bond market.
Official optimism is ubiquitous. On September 10, the City's chief financial officer, Jay Goldstone, said in a speech sponsored by the Bond Buyer newspaper that San Diego has "a new mayor with none of the baggage" of past mayors and "a whole new top management team." Has he forgotten the recent, sudden departures of the chief operating officer, real estate czar, and head of the Development Services Department? "I never met a money problem that could not be solved," effervesced Goldstone, claiming that the City has "great community credibility."
"Goldstone says it's a perception problem," harrumphs a San Diegan with intimate knowledge of San Diego's finances. Of the hard debt/soft debt separation, he says, "It is crazy. Debt is what drives every question in San Diego. To assume a soft debt doesn't have to be talked about -- and that all that has to be addressed is hard debt -- sounds more like the past."
Omitting so-called soft debt from the debt management document is "more manipulation, sleight of hand, putting the head in the sand," says City Attorney Mike Aguirre. He points out that the pension-related debt is only $2.2 billion if a very liberal kind of accounting is used. By the conservative method that the City wants to adopt eventually, the pension/health-care obligation is more than $2.8 billion.
"Till debt do us part," sighs Steve Erie, professor of political science and director of the Urban Studies and Planning Program at the University of California, San Diego. "Debt is debt. It is absolutely specious to separate [hard debt from soft debt]. There is no such thing as soft debt."
Scott Barnett, president and founder of TaxpayersAdvocate.org, says, "If San Diego is ever going to fully put itself on secure financial footing, it must have a clear accounting of all its long-term obligations." Among these are funding for infrastructure needs, information technology, maintenance and replacement of City facilities, and "pension and health for retirees." It's critical now "because this is in a time of likely slowing of revenue growth, especially in property tax receipts."
Says Barnett, "The bottom line is if the mayor and council continue to ignore all of those areas, as they have done for decades, then the City will continue to be in a load of hurt."
In short, the City must stand erect and face those hard/soft debt woes.