Conspiracy of Deliberate Ignorance

San Diego — City government's culture of secrecy has bred something worse: a culture of deceit. The history of the 2002 ballpark bonds proves the point. Federal and local investigators, in their criminal and civil probes into the city's false financial disclosures, should examine the ballpark bonds.

Those bonds gave Wall Street advance notice that something was rotten in San Diego government. Two years later, the city admitted that something was indeed rotten: in bond prospectuses dating back to 1996, it had given false information on its pension deficits.

But were the concealed pension deficits the only problem? Hardly. The handling of the ballpark bonds was a clue that more muck lay under the surface. First, the information in the prospectus accompanying the bonds indicated that the real estate development that was supposed to pay for the ballpark was not going to take place as promised. Voters in 1998 had been told that the project would be "revenue neutral." They had been given specific projections on how the hotel, retail, and property taxes thrown off by the promised development would pay the interest expense of the bonds. But by 2002, just before the bond sale, the city was admitting, "neither the timing nor the amount" of such revenues could be predicted.

The most prominent red flag was the interest rate. The city was selling $169 million of insured, AAA-rated tax-free bonds at an interest rate of 7.66 percent -- a staggering two or three percentage points higher than the rate on a similar bond in those days. Indeed, 7.66 percent was the equivalent of a yield on a municipal junk bond -- some very low-rated, uninsured, highly speculative municipal bond, such as for a project to turn sewage sludge into chocolate ice cream.

At the time, and to this day, some attorneys who were involved in the transaction insist that the high interest rate was a result of lawsuits against the project. Should suits succeed, the bonds could become taxable. But this argument doesn't wash because by the time of the bond sale, more than 90 percent of the litigation had been decided; only three suits were on or headed for appeal. Furthermore, a 7.66 percent yield was still high for an insured, taxable, AAA-rated bond at that time. People in the municipal bond industry -- then and now -- had not seen insured bonds with such high yields, even if one day they would be deemed taxable.

Also, the bonds did not go to competitive bidding. Wall Street's biggest brokerage, Merrill Lynch, had a monopoly on the bonds, to hold them itself or sell them to favorite customers. Even though the bonds were insured, they could only be sold to rich, so-called "sophisticated" investors, probably institutions. "We still don't know" whether institutions or well-heeled individuals got those bonds, says Donna Frye, the only councilmember to vote against the bonds' issuance. "What was being said [in council] didn't seem to match what I was reading in the binders and binders of documents."

Did Merrill Lynch or the bond insurer, Ambac Assurance, discover the pension falsehoods back then? "It's possible," says attorney Stanley Zubel, noting that the insurer could sue to recover its funds in case of default. "Why would they charge such a large premium [high interest rate] if they knew there was gold in the back room?"

The city isn't talking. Ambac won't say if it knew of the pension disclosure problems because it had signed a confidentiality agreement with Major League Baseball. Merrill Lynch says it relied on the information provided by the city. Mistake. Although the bonds came out in February 2002, the city said that as of June 30, 2000, the pension system was 97.3 percent funded and the deficit was only $69 million. (It's now more than $1 billion.) Why didn't the city give the numbers for mid-2001? "This is the game the city and pension system always play," says Diann Shipione, whistle-blowing member of the pension board. "They dial back to the best numbers they can find in the past and give those numbers with an unstated suggestion that those numbers remain current, knowing they are completely fictional."

A dubious superior-court action cleared the way for the bonds. In 1998, when voters were told explicitly how the ballpark would pay for itself, the city gave itself some slight wiggle room. The Padres could "fine-tune" the mix of buildings. But in late 2001, law professor Robert Simmons filed a suit noting that the team had been relieved of 66 percent of its obligation to build office complexes and 33 percent of its pledge to build retail space. The proposed 1000-room Campbell Shipyard hotel -- and other hotels -- had not been financed. This was hardly fine-tuning. It was bait-and-switch, argued Simmons.

In late 2001, city council had approved a proposal to permit most of the real estate to be condominiums, lofts, and townhomes -- not what had been promised. But property-tax revenue from housing of any kind is always offset by infrastructure costs. This would be particularly true for subsidized condos in the ballpark district. There wouldn't be a chance the project could pay for itself -- if there ever was one.

Simmons's argument was unanswerable, so the city didn't answer it. The suit was filed in early December of 2001. The city simply went to court and demanded that it had to be adjudicated -- in the city's favor-- by January 30 of 2002, or the project would die and Major League Baseball would leave San Diego. There was no documentation to back up this claim. Nonetheless, Judge Frederic Link gave the city what it wanted, when it wanted it. Simmons was not given the standard time to prepare for the suit and take testimony or depositions. So he dropped it.

"They polluted the judicial process," says Zubel, who represented Simmons. "The Simmons case was ordered to trial knowing that there was no time for the plaintiff to prepare. That case was expedited based on the politics of the moment."

In many observers' opinions, any probe of San Diego's pattern of under-the-table dealings must extend to superior court. Zubel has another case that the appellate court has twice sent back for retrial. Filing for his client Harvey Furgatch in 2000, Zubel challenged a 1999 deal in which within a month, the value of a parking lot zoomed from $14 million to $21 million -- the exact gap the city needed to complete its ballpark-financing package. The first superior-court judge threw it out, claiming that Zubel should have sued the city as well as the port district. The appeals court sent it back. A second judge threw it out, claiming Zubel should have also sued the state lands commission. The appeals court sent that one back, too, with specific instructions on what the next superior court judge has to do to handle the case equitably. It will be tried again in four months.

"Our local public officials are treating the business of government as if it were their private business," says Zubel. "You can't treat the public treasury like your own personal checkbook."

Scott Barnett, former head of the San Diego County Taxpayers Association, recalls that in 1998, as the city headed for a ballpark vote, he wanted something done about the structural, or realistic, deficit of $40 million a year. He suggested a spending freeze. But he was thumbed down: if spending were frozen, how could the voters be told that there was lots of money for a ballpark? "There was almost a conspiracy of deliberate ignorance between the manager and the city council. The council basically said, 'We don't want to know,' " says Barnett. To balance the books, the city sold assets, diverted money from sewer and water funds to the general fund, neglected infrastructure and maintenance of safety equipment, and escalated the borrowing of money from the pension system.

Some of this activity is still going on. Barnett is not convinced that Mayor Dick Murphy is in on the conspiracy of secrecy. "I think he is absolutely ignorant of how bad finances are. Which is worse? Being venal or ignorant? In his case, it's mostly ignorance."

And what is the ballpark costing? Barnett thinks annual tax revenues from district development come to only $5 million. Debt service is $18 million. Therefore, the ballpark is costing $13 million a year and will drain the city of $10 million a year in perpetuity, even if more hotels are built. Former councilmember Bruce Henderson thinks the annual ballpark cost could be above $30 million, considering opportunity cost, or where the money might have been spent advantageously.