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— The City of San Diego is spinning its way down the slippery slope financially, and the result may be -- surprise -- new taxes. First, consider the spin. Last week, Moody's Investors Service, the bond-rating agency, issued a devastating report on San Diego's finances -- devastating, that is, if you read it carefully. Moody's said in the first paragraph of a news release that the rating on the city's general obligation bonds had been lowered from Aa1 to Aa3. This spin permitted apologists to say that San Diego was still rated at the low end of Moody's "high quality" range.

Look again. That Aa3 only applied to general obligation bonds (those backed by the full faith and credit of the city). But that encompassed only two issues amounting to $62.8 million.

For certificates of participation (notes based on expected future revenue) and lease revenue bonds (purportedly supported by income from leases and the like), the rating fell to the next lower grade, A, and worse, to the middle of that grade, or A2.

A-rated bonds are "upper-medium-grade" obligations, according to Moody's. So those particular bonds are only in the middle of the upper middle. And that's $301.3 million in bonds, including the $192.5 million convention center expansion bonds.

The 1996 stadium bonds were downgraded to A3, or the bottom of the upper-medium range. Moody's warned that it might have to lower ratings again. Keep in mind that Moody's and other bond-rating agencies suffer grade inflation. "Moody's is an easy grader -- always fond of San Diego," says Carl DeMaio, president of the Performance Institute, a private organization pushing for fiscal reform.

Moody's scolded the city for its structural deficits, or chronic spending of more money than is coming in. Then its analyst, Dari Barzel, made a telling comment. "It is notable that the city did not explore raising revenues sufficient to address its increased expenses, although its charter potentially provides options for doing so."

Under Section 76 of the City Charter, between 1961 and 1978, the city levied a property tax when necessary to meet the requirements of the pension fund. But that was wiped away with the passage of Proposition 13 in 1978. Then in March of 2003, the city manager mentioned in his report that "the city attorney's office is presently conducting a thorough analysis" to determine if this retirement tax could still be workable under today's law.

Diann Shipione, the whistle-blowing member of the city's pension board, called Barzel. She affirmed that her reference was to the possible reincarnation of the retirement tax. (Barzel did not return my call.) "The city obviously has been talking privately about imposing a pension tax, probably after the election," says Shipione. "It looks like it has been part of a hidden agenda all along."

Chris Morris, head deputy city attorney, says that his office is not looking at the matter now, no matter what was happening in 2003.

This fall, the city will vote on an increase in the transient occupancy tax, or hotel tax, from 10.5 cents to 13 cents. If it passes, it could bring to the general fund $15 million for the second half of fiscal 2005, says DeMaio. "If it passes, the chance for real reform will be delayed," says DeMaio. "This is a city teetering on the edge; one more slight push and it tumbles. We believe what will cause it to tumble will be voter rejection of the [transient occupancy tax]. This is their Hail Mary pass -- what they are banking on to pull them out of the problem."

City officials "are praying it will pass," says Scott Barnett, former executive director of the San Diego County Taxpayers Association. "If it passes, at best it will help stop some of the hemorrhaging. My guess is that it will lose." In March, the taxpayers only gave it 61 percent of the vote. That time, money was to be earmarked for police, fire, the arts, and other worthy causes. In November, the city only needs a bit above 50 percent. However, "This time they are giving a blank check to the city council, which hasn't shown it can manage its way out of a paper bag."

Barnett says San Diego "is coming close to a perfect storm of financial disaster. There has been a structural deficit of $40 million a year made worse by increased spending and increased employee salary and benefits. The pension system is underfunded. The state is taking more money from the city. There are major infrastructure needs. Now with the lower bond ratings, the city will pay higher interest rates on its debt."

Barnett mentions juggling of the books -- just as Moody's did. "The city has diverted over $100 million of water and sewer fees to the general fund and sold close to $50 million of land. We are losing $13 million to $15 million a year on the ballpark." Then, just as the hated 60,000-seat guarantee was close to coming to an end, and the Chargers were about to ante up some significant rent, "The city cut a deal that was worse for the taxpayers -- giving up the rent just as the ticket guarantee was expiring."

Says Barnett, "The sad thing is that Mayor Murphy had the best opportunity of any mayor in 20 years. He came in owing nobody. The downtown establishment didn't support him; the unions didn't. He could have said that the cupboards are bare; we are spending more than we are taking in. Instead he took the easy route and became one of the downtown boys."

Since Murphy took office in 2000, the city has hired 1000 more people, and "most were nonessential," says Barnett.

He adds, "The only way we can really improve our bond rating is cutting costs at city hall; I am convinced there is $100 million of waste there that could be cut. But passing the increase in the transient occupancy tax would be like giving rum to drunken sailors."

It hasn't always been this way, points out Shipione. Under Mayor Pete Wilson, the pension plan of 1981 "was basically a tougher plan," says Lori Chapin, attorney for the retirement board. Among many things, "There were no disability retirements." But by 1990, the plan had been incrementally made more generous, says Chapin.

"That's when the real gaming of the system began," says Shipione. The city went to more permissive pension accounting. It began skimming earnings from the pension plan to fund the healthcare plan. In 1996, to fund the Republican convention, the underfunding got rolling. The pension board, with city employees and their labor union representatives having a solid majority, would only go along with the underfunding if benefits would go up.

In 2002, Shipione warned that the system was headed for trouble. She was hooted down by officialdom, including her colleagues on the pension board, and the council passed a measure that delayed reform. The only person to vote against it was Donna Frye, who is the only member who understands business and finance, according to Barnett. In January of this year, the city admitted that its disclosures in bond prospectuses dating back to 1996 were flawed, and now the city is under federal criminal and civil investigation.

Moody's says that "financial reporting remains an area of concern." It points out that San Diego did not take advantage of the prosperous late 1990s to do something about its structural deficit, kept its reserves too low, and, unlike other California cities, didn't put away money to make up for the amount the state would pilfer.

The city has been riding bubbles. Perhaps the stock market boom of the late 1990s closed its eyes, although, as Moody's points out, the city's problem lies in underfunding, not in the bear market. San Diego rode another bubble: real estate values. On a per-capita basis, debt grew by 30 percent from 1996 through 2002. But as a percentage of real estate valuation, it remained flat -- perhaps another reason for the lack of discipline.

The council has now authorized spending $1.2 million for an audit. "Why does it take six months and cost $1.2 million to fix footnotes?" asks DeMaio.

"I tried to find out about that," says Frye. "I just kept getting stonewalled. It's a culture in city hall. You are supposed to get answers on your own time and not ask questions in public."

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