In western lore, an hombre named the Wizard of Wichita would ride into a town, stride into a saloon, take one quick look around, and unerringly identify every no-good son of a bitch in the joint. And so it is with Roger Lowenstein, author of the new hot-selling book While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis (Penguin Press). In researching the book, Lowenstein came to San Diego and sized up the stultifying and sticky-fingered establishment, corrupt political structure, greedy unions, and standpat mainstream media which produced the pension crisis that could send the City into bankruptcy court.
Some San Diegans may argue with his interpretations, but they shouldn’t criticize his adept weaving of facts into a compelling narrative. This book will open the eyes of even those who have followed the pension crisis for years. Lowenstein galloped into town, talked with the right people, read the right documents, and fingered the right rascals.
He quickly figured out the culture. “San Diego was a close-knit town — a big city in which local officials functioned like a cozy board of directors,” writes Lowenstein. “Businessmen seeking tax breaks had open entrée to City Hall, and political back-scratching was a way of life.… In effect, [San Diego officials] tapped the pension fund for every purpose that might appeal to politicians — park maintenance, policemen’s wages, new fire trucks, subsidies for sports teams.”
He is at his best in describing alleged dignitaries. Former mayor Susan Golding had an ambitious agenda. “She was intemperate with doubters and seemed to regard the financing of her schemes as little more than a detail,” writes Lowenstein. “Golding ordered [former city manager] Jack McGrory to figure out how to pay for it all…no one quite understood how he did it, and that was his secret.… Council members complained they didn’t understand his machinations…but the truth is they were happier not knowing what McGrory was up to.”
When McGrory ran out of accounting gimmicks, he would beg the council for a tax increase, but “the business establishment, invariably led by the Union-Tribune, almost always thwarted him.” Business-licensing fees and the hotel tax were very low by comparison with other California cities. “Overall, the revenue collected by the City amounted to only 2 percent of household income — the lowest ratio of any big city in the state.” No matter. “If the residents of this deeply conservative enclave mistrusted government, they simply despised taxes.”
Golding flew home from a Super Bowl with Chargers’ owner Alex Spanos. It was an “apparently aphrodisiacal experience,” writes Lowenstein. She decided the stadium had to be upgraded to attract Super Bowls. Thus was born the 60,000-seat guarantee that would turn into an embarrassing disaster. Golding and McGrory plotted how to tap the pension fund, partly to finance the 1996 Republican convention, designed to put Golding in the U.S. Senate. One board member of the fund “rightly object[ed] that the pension fund did not exist for the purpose of bailing out the city, much less its football team,” writes Lowenstein. But the plan went forward. Weak-kneed lawyers and actuaries, as well as ignorant councilmembers, let it happen. The City appeased its workers by boosting monetary promises to them; the unions engaged in “patent blackmail.” The deficit expanded wildly, and city government and mainstream media looked the other way. Mayor Murphy appointed a commission to look into the City’s finances. One member knew it was a time bomb. He was talked out of sounding a loud warning and later was filled with remorse for capitulating.
By 2002, it was obvious the pension system was in deep trouble. The council and pension board prepared to consider Manager’s Proposal 2 (MP-2). “To cure its ailing retirement system, San Diego was going to further strain it by hiking benefits!” writes an incredulous Lowenstein, who seldom uses exclamation points. Diann Shipione, a member of the pension board, challenged MP-2 strongly in front of her colleagues. “Her tone was relentless and unsparing,” leading them to mock her. The board passed it overwhelmingly. When the actuary challenged the folly, Bruce Herring, deputy city manager, shouted, “You’re an actuary on the edge!” (Herring is now retired at $144,000 a year.) Shipione’s husband, Pat Shea, called his friend Mike Aguirre, then a private lawyer, and told him about the City’s suicidal plan. Aguirre threatened to sue if the city council went ahead. The council pulled a typical San Diego stunt: it put MP-2 on the so-called consent agenda, which is for noncontroversial items. But Shipione showed up and argued strenuously against the conflicts of interest and fiscal stupidity. She called the proposal “almost corrupt.” Councilmember Donna Frye saw that Shipione was right. But the council voted 8 to 1 to try to alleviate its pension problem by grossly worsening it. As is often the case, Frye was the only one to vote against idiocy. The Union-Tribune didn’t even report the story.
Shipione, Shea, and Aguirre, with assistance from Frye, realized that the City had been fraudulently failing to report its huge pension deficits in its bond prospectuses. This is against securities laws. An outside legal firm agreed. In early 2004, in an obfuscated filing with an obscure quasi-governmental repository, the City admitted that as a consequence of its massive pension liabilities, it would have to slash spending or increase revenue. The New York Times called San Diego “Enron-by-the-Sea.”
By 2005, San Diego knew it was in really deep financial doo-doo. In that year’s mayoral election, candidate Donna Frye “refused to rule out tax hikes,” writes Lowenstein. “What little chance remained to Frye was buried by the Union-Tribune, which relentlessly savaged her as a would-be taxer.… This was blatantly demagogic; indeed, it mirrored the attitude of politicians who, in refusing to pay the bills for benefits they had enacted, had brought San Diego to its current pass. Taxpayers would have to pony up. The only question was whether it would be today’s taxpayers or tomorrow’s.” Lowenstein, citing figures calculated by the Center on Policy Initiatives, says that if San Diego would raise taxes to the average level of California’s other big cities, it could pay the pension bill. (However, the author doesn’t note that San Diegans have lower incomes and a higher cost of living than residents of most of those other cities; the taxes would take a bigger bite from the economy.)
In November 2004, Aguirre, a securities lawyer, was elected city attorney. He knew that the pension problem involved criminality. “Official San Diego was terrified of Aguirre,” writes Lowenstein. “City Hall greeted him with a blackout,” denying him pension-related documents. But he fought to get them. “Once he had the files, he allowed Shipione to ransack them.… Shipione went through the files as if she were possessed — tipping over cartons, spilling papers on the floor.” Aguirre locked the door and let Shea go through the papers too. “Not yet in office a month, Aguirre was at war with the pension system, the city manager’s office, the council, and the local police.” But here is Lowenstein’s punch line: “Though his tactics were heavy-handed, they fulfilled a worthy purpose. San Diego’s government had flitted around like a bat intent on avoiding the sunlight for far too long. Now its people would learn the truth.”
Aguirre and Shipione would be brutalized by the corrupt power structure, but they had accomplished their objectives. In his final paragraph, suggesting possible curative measures, Lowenstein writes, “The pension schemes — public and private, federal and local — described in this book have been all guilty of similar crimes. To paraphrase Michael Aguirre, they behaved like ‘credit card junkies’ who charged to the card limit and made only minimum payments.” The heroes and heroines of the San Diego debacle are prophets elsewhere but not at home.